My original decision to purchase Crimson was primarily based on my assessment that the stock, which was trading at under $8, was trading at a big discount to the assets of the company (over $13). Additionally, savvy management seemed eager to own this asset. Since that time there have been a handful of transactions of wine estates that make my asset value estimate look conservative (here and here). While I saw the potential in Crimson’s business it required somewhat of a leap to understand how Crimson would translate its assets into earnings. With the release of second quarter earnings I am now more excited by the business than the assets and believe that Crimson could be worth more than $20 a share.
In March Crimson President and CEO Erle Martin told the Napa Valley Register that he plans to double in size to half a million cases and roughly $100 million in sales by 2016. In the most recent quarter (Q2) Crimson reported 31% revenue growth over the previous year, which is well ahead of its plan to double revenue in four years. This was especially impressive because the rest of the industry did poorly as record bad weather hurt wine sales in the second quarter. Crimson is especially sensitive to weather as they rely on visits to their wineries to drive sales. Thus far weather has been excellent in the third quarter and it would not be surprising to see the sales momentum continue or even accelerate.
In the longer term I expect gross margins to head from 51% in 2012 towards 60% as Crimson utilizes is full capacity. While 60% is unheard of for traditional wine companies it is the norm for well run, high end wineries (see NYT article and WVVI 10-Q). Crimson plans to increase production this year by 36% at existing facilities. This incremental production should have very high gross margins due to higher capacity utilization. The benefits of this increased production on gross margins should begin to be realized by the end of 2014.
Crimson has shown tremendous leverage on SG&A. Sales grew by 31% in the second quarter while SG&A expenses excluding public company costs rose by a mere 5%.
Crimson’s $100 Million Goal
Crimson’s goal of $100 million in revenue by 2016 seems conservative given recent growth rates. At $100 million in revenue Crimson should be able to do at least $30 million in EBITDA and possibly as much as $35 million. If Crimson trades at its peers valuation the stock could reach $20 or higher, with a margin of safety from over $13 in asset value. One could argue that Crimson should trade at a premium to its peers as it is the only pure play high end wine company with rapid growth.