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Company

Business Overview

The Duckhorn Portfolio (NYSE:NAPA) is a producer of luxury wines, or wines sold for $15 or higher per 750ml bottle, in North America. Through an omnichannel sales model, the company sells wines in over 50 countries with bottles ranging from $20 to $200 per bottle.

LOGO

Company’s 10K

In particular, the company offers tiered pricing within the luxury wine segment, enabling thus to attract new customers with lower-tiered wines (e.g., Decoy Brand), and as the customers start to enjoy, deepen their relationship with the brand with higher-tiered offerings (e.g., Duckhorn Vineyards, Kosta Browne). Moreover, the company strengthens its relationship with the customers through:

  • Subscription wine Clubs and Testing Rooms
  • Direct-to-consumer (DTC) sales channel that leverages the company’s multi-winery e-commerce website

Now, what about the product? If you never tried the company’s wine, you may be wondering if it tastes good. Well, let’s answer that question with some numbers. According to Vivino, a wine rated:

  • 4.0 rated is better than 85% of wines in the world (average cost $28.71)
  • 4.5 rated is better than 99% of wines in the world (average cost $128.71)
  • The average Vivino rating is 3.6 (average cost $15.07)

By digging into the platform, you may see that the company’s top-tier wines are rated above the 4.0 Vivino rating; while affordable wines are rated above the 3.6 Vivino rating.

Total Addressable Market (TAM)

The company’s TAM is the global wine market which is currently close to ~$420B and it is expected to reach ~$720B by 2030. All of that said, I prefer to narrow the company’s TAM to the U.S. wine market since the majority of the company’s revenue comes from the domestic market. Below, you can see my estimates for the market of reference.

TAM

Author’s Estimates

The above estimates include both on-premise and off-premise sales. Moreover, we may narrow the U.S. wine market even further, in particular, to the luxury wine segment which in 2020 comprised between 10%-15% (or ~$6B to ~$9B) and expanded at more than double the growth of the U.S. wine market.

Company Valuation

Discounted Cash Flow Model

Let’s now understand how much the company is worth according to the assumptions I have made and which you can see represented below.

DCF

Author’s Estimates

For the top line, I assume a CAGR of 12.1% over the next 10 years and a growth rate in perpetuity that is equal to the current 10-Y treasury rate of 2.92%. In particular, I am assuming a CAGR that is almost double the CAGR of the broader wine industry, because I am narrowing the TAM to the U.S. wine luxury segment. From a top-down approach perspective, I am assuming that the company’s market share by 2031 will reach 0.85% (vs. current share of 0.52%) of the total U.S. wine market. Going forward, I also assume an operating margin for the next year equal to 25.6% (vs. ’21 EBIT margin of 25%) and a target operating margin of 29.8% (sector median value).

The unlevered Free Cash Flow is discounted at a WACC of 6.74%, those computations you can see below.

WACC

Author’s Estimates

In particular, the levered beta has been computed using a bottom-up approach, the company’s ERP using an implied method approach that is further adjusted by the mid-cap premium (+0.5%), and the cost of debt using the synthetic approach. Finally, by putting all of it together, we get the implied value per share, represented below.

Output

Author’s Estimates

As you can see from the above estimates, the implied value per share is equal to $29.47, which means that the company is currently trading at a discount of 31.3% (based on my assumption, you can see that I assume a terminal EV/EBITDA multiple of 13.94x). To better gauge market beliefs, I provide along with the implied value per share, the sensitivity analysis on two key variables: terminal growth rate and WACC.

High Inflation & Wine Industry

The wine industry offers a natural hedge during periods of high inflation. In fact, according to a study:

We find that collectibles have lived up to their reputation as a store of value in inflationary times. Real annual returns are positive during inflationary episodes for all three asset groups, with art at +7%, wine at +5%, and stamps at +9%.

.. Moreover, we notice a possible distinction between art and stamps on the one hand, where performance markedly improves in inflationary periods relative to normal times, and wine, which experiences lower but more consistent returns between normal and inflationary times.

Price returns to wine across all periods, and especially during the eight U.S. inflationary regimes, delivered a positive real return with a hit rate of 50% and an average real return of +5%. Moreover, the company’s exposure to higher-income consumers, whose purchasing power will be less affected by high inflation, provides an additional layer of defense against high inflation.

Investment Risks

Risks to my target price include:

  • Natural Disasters: agricultural risks, water availability, wildfires, floods, disease, and pests could adversely affect the quality and quantity of grapes and thus adversely affect the company’s operating performance.
  • Competition: In the U.S., the wine industry is relatively concentrated among a small number of players with nearly 50% of off-premise US wine sales generated by E&J Gallo, Constellation Brands (STZ), Trinchero, Jackson Family Wines, Ste. Michelle and The Wine Group. Such intense competition may adversely affect the company’s top-line growth.

Final Thoughts

I rate shares as BUY with a fair value of $29.47/share, which implies a 31.3% discount vs. the current price of $20.25.

The company is well suitable for investors looking for value (the company is free cash flow positive and over the last years was able to effectively reduce its interest-bearing debt portion), growth (it is well-positioned within a growing luxury-wine segment), and a hedge against inflation (historically, the price returns to wine during the eight U.S. inflationary regimes delivered positive real returns). Overall, I believe that revenue momentum will remain strong and that the company will be able to effectively navigate near-term macroeconomic headwinds.

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