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Company
Business Overview
The Duckhorn PortfolioNYSE:NAPA) is a producer of luxury wines, or wines sold for $15 or higher per 750ml bottle, in North America. The company sells wines in more than 50 countries using an omnichannel selling model.Bottles available in a range of prices from $20 to $200.
Company’s 10K
Tiered pricing is offered by the company in the luxury wine category. This allows the company to attract new customers using lower-tiered wines (e.g. Decoy Brand), and then as customers enjoy the wines, they can expand their relationship with the brand by purchasing higher-tiered products (e.g. Duckhorn Vineyards, Kosta Browne). The company also strengthens its relationships with customers through:
- Subscription wine clubs and testing rooms
- Direct-to–consumer (DTC), a sales channel that leverages the multi-winery website of the company.
But what about the product itself? You may be wondering whether the wine is good if you’ve never tried it. Let’s look at the numbers to answer that question. Vivino says that a Wine rated
- 4.0 is better than 85% wines around the globe (average cost $28.71).
- 4.5 rating is higher than 99% of wines worldwide (average price $128.71).
- The average Vivino rating (average cost $15.07), is 3.6
You may notice that the company’s top-tier wines have been rated higher than the 4.0 Vivino rating, while the affordable wines have been rated higher than the 3.6 Vivino rating.
Total Addressable Market (TAM).
TAM stands for the company’s global wine market. Close toIt is currently worth $420B and is expected increase to $720B by 2030. Considering that the majority of the company’s revenue comes from the domestic wine market, I prefer to reduce the company’s TAM. Below you will find my estimates for this market.
Author’s Estimates
These estimates include both on-premise as well as off-premise sales. Additionally, we may be able to reduce the U.S. Wine Market, in particular to the luxury wine segment. This segment consists of between 10%-15% or $6B to $9B and has grown at more than twice the pace of the U.S. Wine Market.
Company Valuation
Model for Discounted Cash Flow
Let’s now see how much the company is worth based on the assumptions I made, which you can see below.
Author’s Estimates
I assume a CAGR rate of 12.1% over the next ten years and a permanent growth rate equal to the current 10-Y Treasury rate of 2.92%. Because I am limiting the TAM to the U.S. luxury wine segment, I am assuming an almost double-digit CAGR. Looking from a top-down perspective, I believe that the company will have 0.85% market share by 2031, compared to 0.52% currently.I expect an operating margin of 25.6% for the next year (vs. ’21 margin of 25%) as well as a target operating margin (sector median value) of 29.8%.
The unlevered Free Cash flow is discounted at an WACC of 6.7%, as you can see in the calculations below.
Author’s Estimates
The levered beta was calculated using a bottom-up method, the company’s ERP using an implicit method approach that is further adjusted to the mid-cap premium (+0.5%) and the cost debt using the synthetic approach. The implied value per share is calculated by adding all of this together.
Author’s Estimates
As you can see, the implied share value is equal to $29.47The company is currently trading at a discount rate of 31.3%. (Based on my assumption you can see that I assume a terminal EV/EBITDA multiple in excess of 13.94x). I provide the implied value per shares, along with the analysis on the sensitivity of two key variables, terminal growth rate (WACC), to better gauge market beliefs.
High Inflation & Wine Industry
The wine industry is a natural hedge against inflation. According to fact, to a study: “We believe that collectibles live up to their reputation of being a storehouse of value in inflationary periods. Real annual returns for all three asset groups are positive during inflationary episodes. Art is at +7%, wine +5%, and stamps @ +9%. .. We also see a possible difference between art and stamps, where performance significantly improves in inflationary period relative to normal times. And wine, which has lower but more consistent returns between normal time and inflationary.“
Wine prices returned positive real returns across all periods, but especially during the eight U.S. inflationary regimes. The hit rate was 50%, with an average real return of +5%. The company’s exposures to higher-income consumers, whose purchasing powers will be less affected, adds an additional layer of protection against high inflation.
Investment Risks
My target price is at risk
- Natural DisastersAgricultural risks, water availability and wildfires, floods and disease could adversely impact the quality and quantity grapes and therefore negatively affect the company’s operating performance.
- Concurrence: The U.S. wine market is concentrated within a small number. Nearly half of US wine sales are off-premise. This includes E&J Gallo (STZ), Trinchero (STZ), Jackson Family Wines, Ste. Michelle and The Wine Group. The company’s top-line growth could be affected by such intense competition.
Final Thoughts
I rate shares as BUYWith a fair value at $29.47/share, this implies that there is a 31.3% DiscountCompare to the current price of 20.25
Investors looking for value will be pleased to know that the company has a strong track record of delivering positive real returns. Overall, I believe the company will continue to enjoy strong revenue momentum and will be able navigate any near-term macroeconomic headwinds.
