Crimson Wine Group: Bull Case on a Unique Spin-off Opportunity

My write-up on Crimson Wine Group (CWGL) is up at Market Folly. I explain why the stock may have 70% upside.

Tsachy Mishal on March 6, 2013 at 2:34 pm | Filed Under Uncategorized

Kevin Tracey

You mentioned a link to a Wine Spectator article but the link isn’t active at Market Folly – can you post the url?

Thanks
- http://www.capitalobserver.com/ Tsachy Mishal
  
  http://www.winespectator.com/webfeature/show/id/Napa%02s-Pine-Ridge-Winery-for-Sale_20702
  - Ari Dukas
    
    nice writeup. you state that it’s too small for institutions to hold, but there hasn’t been much selling pressure thus far. the price is stable since spin and vol seems pretty light. do you have thoughts about whether there should be som selling soon which would drive down the price?
    - http://www.capitalobserver.com/ Tsachy Mishal
      
      CWGL has traded over 1.2 million shares a day, which is 5% of the market cap. I think when this stock settles down it likely won’t trade much more than 100,000 shares a day. I believe the major indices that hold Leucadia have already done their selling.
Thomas Ford

Interesting write-up. I had a few questions for you. First, I have always thought of earnings power as an attempt at a normalized number. Does the acreage in Horse Heaven Hills contribute to the underlying earnings that you have assumed or do you need to adjust the value for that separately? Also, you mention that maint capx is 1/2 that of D&A–is that because capx is lumpy based on expected future capacity growth? Assuming that growth is required here, maybe an upward adjustment or use of D&A (or a higher number than D&A) may be a better proxy? I have not looked at the comps that you used, so am not sure of their return metrics, but don’t you think it is a stretch to use those multiples for a company with ROIC and CROIC of 10-11%? Lastly, it doesn’t give you pause that Jefferies wanted no part of this? Maybe they thought this was simply a “hobby” investment on the part of Cummings and Steinberg? I have often heard that you dont get into the winemaking business to make money, but rather to enjoy the fruits!
- http://twitter.com/CapitalObserver Tsachy Mishal
  
  1. I did not project a normalized earnings number. I projected 2013 earnings. The only growth I projected was at Chamisal & Seghesio, which was in the Form 10. Horsehead would remain largely un-utilized.
  2. In the past capex has been roughly half of D&A based on the numbers in the Form 10. My guess is that wine making equipment is a large upfront investment but is long lasting.
  
  3. Maintenance caper is half of D&A. They are adding 108,000 barrels of production for less than $3 million so not a lot of capex is required to expand production.
  
  4. The reason the ROIC is low is because the assets are not being fully utilized and there is no leverage(actually there is net cash).
  
  5. I don’t agree that Jefferies wanted no part of this. My read of this sentence “ascribing a value to Crimson no greater than approximately its book carrying value” is that Jefferies was willing to accept book value.
  
  6. Leucadia has produced an average annual return of 22% a year. Cummings and Steinberg did not achieve this through “hobby” investments. The evidence points to the contrary. Pine Ridge was bought for peanuts in 1991 and 9 years later was on the market for $150 million. Seems like a good investment.
Charlie Munger

How did you calculate ASP?
- http://twitter.com/CapitalObserver Tsachy Mishal
  
  Price per case was $236 in 2009, $214 in 2010, $185 in 2011 & $198 for the first nine months of 2012. I assumed $195 for 2013
  - Charlie Munger
    
    Thank yo for the response I was just wondering where you found/calculated those numbers? I have it as $205 for 2009, $189 for 2020, $164 for 2011 and I could not find cases sold for the fist nine months. For 2009 if you take revenue from Wholesalers & Direct Consumers you get $18.8MM divided by 92K cases sold equals $204.64 per case. How did you get get to $236 per case?
    - http://twitter.com/CapitalObserver Tsachy Mishal
      
      I used the total revenue number
      - Charlie Munger
        
        And where did you find cases sold for first nine months? Thanks
      - http://twitter.com/CapitalObserver Tsachy Mishal
        
        Full year 2012 numbers are available in the LUK 10-K
http://profile.yahoo.com/BWCOZAMUSJCVMBC24DBRTBSEUI Shaun

if you’re long never a bad idea to add the disclaimer that you’re long the stock if you are just to keep the vampires (lawyers) happy
- http://www.capitalobserver.com/ Tsachy Mishal
  
  I thought it was obvious but you are probably right.
  
  Best,
  Tsachy Mishal
http://profile.yahoo.com/BWCOZAMUSJCVMBC24DBRTBSEUI Shaun

this is a great writeup and I’ve been working on this since the spin so thanks for posting. Although I am a shareholder I think your earnings numbers look a bit aggressive.

1. while they won’t have material cash taxes next year they only have ~$17m federal NOLs so that will not last long, 1-2 years max, so valuaing them on an untaxed number and then comparing them to other peer earnings valuations that are taxed seems aggressive. I think it is probably more realistic to add some tax expense in here as that is how their normalized earnings in the future will be. Adding a 35% tax rate to the earnings power and then adjusting peer valuation removes quite a bit of the upside.
- http://twitter.com/CapitalObserver Tsachy Mishal
  
  I agree that I might be a few quarters ahead on my 0.70 estimate. I outlined my assumptions in the comments section of MarketFolly. But there is the potential for a lot of growth ahead. In todays Napa Valley register the CEO lays out a goal for growth to $100 million in revenue by 2016 http://napavalleyregister.com/lifestyles/food-and-cooking/wine/columnists/paul-franson/new-wineries-attest-to-industry-recovery/article_70d466c4-879c-11e2-ab03-001a4bcf887a.html
  - http://profile.yahoo.com/BWCOZAMUSJCVMBC24DBRTBSEUI Shaun
    
    2. Being listed on the OTC is a relatively cheap way to be public but I don’t see any increased cost assumptions which will also reduce earnings

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Crimson Wine Group: Bull Case on a Unique Spin-off Opportunity

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Crimson Wine Group: Bull Case on a Unique Spin-off Opportunity

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