Investing in Wine
Uncorking the Napa Valley Situation
Read the words “natural disaster” and “Napa Valley” together in one headline and one thing immediately pops into mind… wine prices are going to rise!
Well, maybe just a little.
Residents of northern California were shaken out of their beds by a magnitude 6.1 earthquake early Sunday morning at around 3:20 am, centered some six miles south of the township of Napa – one of the world’s most productive and renowned wine regions. While there were no fatalities, more than 200 persons were admitted to hospital, 17 of which are in critical condition.
This latest earthquake reminds investors how their portfolios can be unsettled by a natural disaster at a moment’s notice. Earthquakes strike much more frequently than many realize.
According to the European-Mediterranean Seismological Centre there have been 331 earthquakes of magnitude 4 or higher in the last 2 weeks worldwide, 185 in the last week, 46 in the last 48 hours, and 23 in the last 24 hours – which include Napa’s 6.1 rattler and a 6.9 quake in central Peru yesterday afternoon.
As Wealth Daily’s focus is on the economic impact of news stories, let’s take a brief look at some businesses that can be adversely affected by natural disasters, and others that are generally benefitted.
The Harder Hit
“The San Francisco Bay Area's strongest earthquake in 25 years struck the heart of California's wine country early Sunday, igniting gas-fed fires, damaging some of the region's famed wineries and historic buildings,” reported the Associated Press. “Ruptured water mains and gas lines” lined the streets, while “dozens of homes and buildings across the Napa Valley were left unsafe to occupy”.
As with almost every large earthquake in a metropolitan area, utilities are pretty much always at the top of the list of the sectors hardest hit. Local gas and power companies will be spending a great deal in repairs, often impacting their publicly traded stocks to at least some extent in the current and even following quarters. Insurance companies are also near the top of that list, though many offer extremely limited earthquake coverage given the severity of the damage they can inflict.
Then we have the municipalities who can be severely set-back financially due to emergency response expenses and infrastructure repairs. “Napa Fire Department Operations Chief John Callanan said the city had exhausted its own resources trying to extinguish at least six fires after 60 water mains ruptured, as well as transporting injured residents, searching homes and collapsed carports for anyone trapped and responding to 100 reports of leaking gas,” revealed the Associated Press.
In fact, if the town is rather small or already financially strapped, even a moderately powerful quake can be enough to plunge the local municipality into bankruptcy, rendering its bonds next-to-worthless, depending on the terms of default. Even if the township is not bankrupted, it may be forced to offer an emergency issuance of bonds for sorely needed funds, likely at a much higher interest rate than normal.
In addition to these most commonly hit sectors, there may often be region-specific sectors that are unique to the area where a quake strikes. In yesterday’s case we have the wineries, which may have lost hundreds if not thousands of bottled wine, or dozens of barrels of wine not yet bottled. Some of these barrels may have been waiting for years for their time to finally be sold, seriously reducing the supply of specific vintages.
Sandy Taylor, co-founder of the Taylor Family Winery located about a mile from the quake’s epicentre, informed reporters her winery was fortunate to have lost nothing but a single barrel of 2013 Chardonnay. “The finished bottles at the winery were fine,” Taylor explained. “The finished goods are in cases, boxed, palletized and shrink-wrapped. I think the shrink-wrap was what kept them safe.”
Yet others like David Duncan, CEO of Silver Oak winery located about half a mile from the epicenter, were hit a little harder, losing three barrels of the winery’s “reference bottles” which are used to blend previous vintages. “They’re completely irreplaceable,” Duncan laments the loss.
A barrel will typically hold some 25 cases, or 300 bottles, of wine, with prices starting at $50 a piece. One barrel can thus contain $15,000 worth of wine – minimum. “Some wineries could be facing some fairly sizable financial damage,” Duncan adds.
Investors can expect the prices for certain vintages from Napa Valley wineries to increase, though the extent of the losses for particular years and brands will take some time to tabulate.
Those Likely to Benefit
Yet there are some businesses that may actually benefit from natural disasters, especially those involved in the construction industry – from builders to repair companies to lumber and hardware retailers.
But even then, the rather small area of a quake zone wouldn’t have much of an effect on a national company’s stock, such as Home Depot (NYSE: HD) for instance. Instead, look for local publicly traded lumber and construction companies to show larger gains than the national chains, since the percentage of sales increases will be greater for the smaller companies.
The benefits would similarly extend to other locally owned publicly traded companies in the quake’s area. Not only will homes and buildings need to be repaired, but their furnishings will need to be replaced - including appliances, furniture for both home and office, computer systems, windows, carpeting, roofing, automobiles and so much more. Again, the stocks of local companies would show greater increases than those of national companies.
Though the wineries of the Napa region might be adversely affected as noted previously, the wines themselves, on the other hand, may be greatly benefitted. This is a case where a winery’s two stocks clearly diverge – company stock from wine stock. While a winery’s corporate stock may fall, the value of certain wine stocks may rise from lost supplies.
Wines have long been valued as investments in their own right. Reduce a vintage’s supply by hundreds or even thousands of bottles, and the price for the bottles that remain can go sky high in no time. Investors already active in wine investing may wish to pay close attention to any losses reported by Napa Valley wineries, purchasing a few bottles of those vintages that have lost the most inventory.
Napa Winery Stocks
As the recent quake’s most impacted sector is the wine industry, here are just some of the publicly traded wineries whose stocks may be adversely affected:
Diageo (NYSE: DEO), a $73.87 billion large cap, and Constellation Brands (NYSE: STZ), a $16.8 billion large cap, both hold significant stakes in wineries all across the Napa Valley, and both may experience some selling pressure early in the week.
“Constellation owns the Robert Mondavi, Clos du Bois, Estancia and Ravenswood labels and had wine sales of $586 million in its most recent quarter, about 38% of total spirits sales,” reports USA Today. For its part, “Diageo owns Beaulieu Vineyards in Napa and Sterling Vineyards in the nearby town of Calistoga”.
A third company of interest to investors would be Brown-Forman Corporation (NYSE: BF.A), a $19.74 billion large cap that owns Korbel Champagnes. Yet rather than fall, it is quite possible its stock will rise, given how the company is a major supplier of oak barrels to the region’s wineries. It all depends on how many barrels were actually smashed to pieces – likely not many.
Any pullback in wine stocks should be momentary, though. Despite the rather long and sluggish economic recovery over the past five years, certain luxuries like wines have not been hurt in the least. As per the graph below, since the market bottomed in March of 2009, all three spirits producers noted above have beaten the S&P 500 broader market.
Where the S&P (black) has posted gains of some 165% since then, Diageo (beige) has grown some 170%,
Brown-Forman (brown) has increased 250%, while Constellation Brands (blue) has skyrocketed 560%.
While Diageo’s growth has slowed greatly recently, with quarterly revenue and earnings growth at -18.80% and -30.30%, the others have been growing their businesses quite robustly, with Brown-Forman reporting 4.40% and 17.70%, and Constellation posting a phenomenal 126.60% and 290.70% in the respective metrics.
In all three cases, the companies’ returns on assets and equity are also very impressive, with Diageo reporting 8.09% and 28.88% respectively, Brown-Forman posting 15.54% and 36.01%, and Constellation posting 7.48% and 50.62%. Investors can get mighty intoxicated on just such returns alone.
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