My Trip To the Crimson Wine Group Annual Meeting

I recently attended the annual meeting of Crimson Wine Group, the owner of 5 wine estates that was spun off from Leucadia in 2013. In the tradition of Leucadia, Crimson does not communicate with Wall Street. There are no earnings press releases, conference calls or presentations and management does not take phone calls. The only way to get information from Crimson is through their SEC filings. When I heard that Crimson would have a Q&A at their Annual Shareholders Meeting I decided to make the trip to Napa as I had a number of questions for management.

The annual meeting took place in a wine cave at the Pine Ridge estate. Ian Cummings (Leucadia co-founder) was supposed to host the event but due to a surgery Joseph Steinberg (Leucadia co-founder) did so in his place. Joseph Steinberg has a reputation for being the bad cop to Ian Cummings good cop and he lived up to his reputation. When asked why Crimson was spun off he answered, “because we wanted to”. Management declined to answer many of the questions but I learned a good deal about the company none the less.

The first question I asked the CEO was about a newspaper article that quoted him as saying that he wanted to reach $100 million in revenue by 2016. He seemed to back off that statement and said that he wished he did not say it. In addition, Joseph Steinberg emphasized numerous times not to have too high expectations for the short term as progress in the wine business takes time.

The most important piece of information I came away with from the meeting was finding out why Joseph Steinberg believes Crimson is a good investment. Joseph Steinberg alluded to the private market value of the wine estates being well above the GAAP book value. He called Napa the Hamptons of the Bay Area and noted how much prices have gone up since they purchased the estates. He also noted that as the Hamptons of the Bay Area, Napa/Sonoma real estate prices are likely to continue to rise over time. Steinberg views the rise in the estate values as part of his profits in addition to the profit of the actual wine business.

When an attendee asked Joseph Steinberg to value the five wine estates he replied “I’m not going to give you the NAV. You’re an analyst. I’m sure you can figure it out for yourself”. As an analyst I have taken many stabs at trying to figure the value of Crimson’s five estates and I believe that they are conservatively worth $15.50 a share (likely more). Assuming 3% a year asset appreciation on $15.50 of assets yields an additional 5% a year of return in asset appreciation on top of any earnings (at the current stock price). 

Joseph Steinberg spent most of the meeting playing down expectations and noting that progress takes time and patience in the wine business. However, he ended the meeting with a vote of confidence for the stock telling shareholders “we will get rich together slowly”.

Crimson Wine Group Asset Value

Valuing Crimson Based On Assets
Crimson has a stated book value of $8.12. However, this does not take into account the value of two of Crimson's most valuable estates. Crimson acquired Pine Ridge in 1991 and Archery Summit was started in 1993. These two estates are carried for next to nothing on Crimson's book due to GAAP accounting. In 2001 these two estates were put on the market for $150 million as seen in this Wine Spectator article. It makes little sense that they are assigned almost no value.
Napa Valley estates trade at record prices and at significantly higher prices today than they did in 2001. It is estimated that the Araujo Estate in Napa recently sold for over $100 million (or $2,630,000 per acre) . Araujo, has 38 acres and produces approximately 6,000 cases a year. Inglewood Estate, recently sold for an estimated $20 million (0r $666,000 per acre). Inglewood has 30 acres and produces 5,500 cases. The new owners are rebranding the estate suggesting weakness of the Inglewood brand.
Pine Ridge, which is located in Napa, currently produces 80,000 cases a year and has 168 acres. Pine Ridge has an additional 46,000 cases of capacity. Inglewood'd brand is clearly is clearly inferior to that of Pine Ridge. At Inglewood's valuation ($666.6 k per acre) Pine Ridge would be valued at $112 million. At Araujo's valuation ($2.63 million per acre)Pine Ridge would be worth $442 million. The answer to Pine Ridge's valuation likely lies somewhere in between. I believe that Pine Ridge alone could be sold for at least $200 million.
Archery Summit is the premiere estate in Willamette, Oregon. Archery Summit has 100 acres and produces 15,000 cases a year. Archery Summit is able to charge $150 for its Pinot Noir, far more than any other winemaker in the region. I estimate the value of Archery Summit to be $20 million.
Crimson's purchased its three other estates in recent years. Seghesio was bought for $86,000,000 in May 2011 and is located in Sonoma. Since then the value of Sonoma estates have risen significantly. Additionally, Crimson expanded capacity and has grown sales at Seghesio. Seghesio would likely sell today for over $100 million. Chamisal was bought for $19,200,000 in August of 2008. The purchase price of Double Canyon in 2005 and 2006 was undisclosed but I estimate it to be worth at least $10,000,000. Crimson recently sold land that it was not using at Double Canyon for 70% above book value. It is possible that even the land that Crimson bought in recent years is being carried drastically below market value.
The table below summarizes my estimate of the value of Crimson's wineries:
Pine Ridge / Archery Summit$ 220,000,000
Seghesio Family Vineyards$ 100,000,000
Chamisal Vineyards$ 19,200,000
Double Canyon$ 10,000,000
Total$ 349,200,000
Adding my estimated land value to the $30 million in cash & investments Crimson will likely have at the end of this quarter yields a tangible book value of roughly $15.50, or a price 75% higher than the current quote.