Andrew Peller Limited

Andrew Peller Limited

Revenues per share (the red line) have increased at an average of about 5% per year for the then years shown with a recent acceleration. Adjusted earnings per share have risen faster at an annual average of 11% per year.

Andrew Peller Limited
RESEARCH SUMMARY  
Report Author(s): InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  The Author(s) hold no shares
Based on financials from: March ’18 Y.E. + Q2 ’19
Last updated: January 7, 2019
Share Price At Date of Last Update:  $                             13.93
Currency: $ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): (lower) Buy rated at $13.93
SUMMARY AND RATING:  The graph of revenues per share (red line) shows  modest but steady growth with a recent acceleration. Earnings per share growth was stronger at an average 14% annually in the past five years. The Value ratios would indicate a rating of Weak Buy / Hold or perhaps (lower) Buy. Management quality and integrity appears to be strong. The insider trading signal is moderately positive. Executive compensation is not excessive. The outlook is for modest growth. The company has some competitive advantages in terms of brand loyalty but also faces low-cost imported competition. The company should continue to prosper over the years and appears to be a relatively low risk operation. Overall we would rate this as a (lower) Buy. A reasonable strategy might be to take an initial small position with a view to adding to that if the price becomes more attractive.
LONG TERM VALUE CREATION: The company has been a good creator of value over the longer term.
DESCRIPTION OF BUSINESS: (Based on the year ended in March 2018). Andrew Peller produces wine across the spectrum of prices. It also produces a small amount of Whisky, wine based liqueurs and ciders.  Its brands include Peller estates, Copper Moon, Hochtaler, Wayne Gretzky and others. While it has 16 vineyards it appears that much of its grapes are purchased. It has 10 wineries six of which include retail and tour centers.  97% of sales are in Canada the remainder is primarily to the U.S. although there are modest sales in 20 other countries. The company sells wine-making products across Canada through 170 authorized wineexpert retailers and 600 independent retailers. The company owns and operates 101 wine retail stores under the banners: Wine Shop, Wine Country Venters, and Wine Country Merchants. There are 1,398 employees of whom 550 are in the retail stores.
ECONOMICS OF THE BUSINESS: The economics appear reasonable good in that it sells branded products which do not compete strictly on price. Profits on sales are 8.3%. Sales are 82% as large as the ending asset investment and equity is 50% as large as assets. This results in an attractive 13.6% return on ending equity.
RISKS: Andrew Peller believes that Cannabis legalization will reduce Alcohol consumption by perhaps 5% or more but mostly impacting and beer but would slow the growth in wine. We would consider this to be a relatively low risk company in that sales volumes and prices are relatively stable and costs are also relatively stable. Potential risks would include product contaminations and changes in where wine can be sold and possible increases in taxes. Ontario may allow more competition and privatization.
INSIDER TRADING / INSIDER HOLDING: (From June 1, 2018 to January 4, 2019)  There were two notable buys, a director bought 2000 in September at $17.20. An executive bought 3000 in September at $16.47. There was a about a half dozen other buys but they were small, involved odd lots and occurred on the same dates and therefore were likely compensation taken as shares or some kind of regular program buying and so offer no real signal. There was one exercise of options and sale of 5,333 shares at $16.48 to hold 23,392. There was one sale of 1600 shares at $17.89. Overall given this and given today’s lower share price of about $14, the insider trading signal is considered moderately positive.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (pass), has favorable long-term economics due to cost advantages or superior brand power (at least marginal pass due to established  brand value), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (pass), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass)
MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings per share growth in the past four quarters beginning with the most recent was 6%, 15%, not meaningful and 55%. In the same four quarters revenue per share grew 9%, 5%, 7% and 7%. Overall the recent earnings trend is good.
COMPARABLE STORE SALES  OR INDUSTRY SPECIFIC STATISTICS
Earnings Growth Scenario and Justifiable P/E: The current P/E of 19 can be justified with growth of about 9% in earnings per share over the next five years.
VALUE RATIOS: Analysed at a price of $13.93 and based on the A shares. The price to book value ratio is 2.58. The dividend yield is  modest at 1.5% and represents a payout ratio of 28% of trailing earnings. The trailing adjusted earnings P/E ratio is moderately unattractively high at 19. The ROE is very strong at 14.9%. Adjusted earnings per share grew a compounded average of 14.3% in the past five fiscal years which is very strong and the growth was steady. In that same 5 year period revenues per share grew at a smaller rate of 4.0% (But around 7% in the last year)  – and indicating that earnings were increased through higher margins and cost efficiencies. We calculate an intrinsic value of only $10.33 if earnings per share grow at 5% for five years and the P/E declines to 14 and $15.59 if earnings per share grow at 9% for five years and the P/E declines only slightly to 18. Overall, the value ratios indicate a strong company which however is likely about fully valued and therefore indicating only a Weak Buy / Hold to (lower) Buy rating.
SUPPORTING RESEARCH AND ANALYSIS  
Symbol and Exchange: ADW.A, Toronto
Currency: $ Canadian
Contact: info@andrewpeller.com
Web-site: www.andrewpeller.com
INCOME AND PRICE / EARNINGS RATIO ANALYSIS  
Latest four quarters annual sales $ millions: $382.2
Latest four quarters annual earnings $ millions: $29.1
P/E ratio based on latest four quarters earnings: 20.6
Latest four quarters annual earnings, adjusted, $ millions: $31.7
BASIS OR SOURCE OF ADJUSTED EARNINGS: We used management’s figure for adjusted earnings which in recent quarters excluded unrealized gains and losses on certain financial hedges. In prior years we used earnings from continuing operations or a similar figure provided by management.
Quality of Earnings Measurement and Persistence: The earnings quality is strong.
P/E ratio based on latest four quarters earnings, adjusted 19.0
Latest fiscal year annual earnings: $30.1
P/E ratio based on latest fiscal year earnings: 19.9
Fiscal earnings adjusted: $29.3
P/E ratio for fiscal earnings adjusted: 20.5
Latest four quarters profit as percent of sales 8.3%
Dividend Yield: 1.5%
Price / Sales Ratio 1.57
BALANCE SHEET ITEMS  
Price to (diluted) book value ratio:                                         2.58
Balance Sheet: (As of Q2 fiscal 2019) Assets consist as follows: 33% is wine inventory, 42% property plant and equipment of which 31% is machinery & equipment, 31% is buildings, 19% is vineyards and associated land and 19% is other land (includes 16 vineyards, 10 wineries of which six include retail space  and several offices and warehouses), 11% purchased goodwill, 8% accounts receivable and 4% intangibles (mostly the purchased value of brands and customer relationships plus some software) 1% is biological assets which is grapes still on the vine. These assets are financed as follows: 53% by owners equity, 25% debt, 13% payables, 5% by deferred income taxes, 2% by a reserve for post-employment benefit obligations and 2% other small items and rounding.
Quality of Net Assets (Book Equity Value)  The book value of the equity in assets is solid as evidenced by the low double digit ROE and by the nature of the assets (see the description of the balance sheet).
Number of Diluted common shares in millions:                                  43.2
Controlling Shareholder: (Updated January 2019) The company is controlled by the Peller family’s holding company called Jalger which owns 61% of the voting shares and about 8% of the non-voting shares. The Peller family members own addition shares individually with John Peller owning 11.6% of the voting shares.
Market Equity Capitalization (Value) $ millions: $601.8
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 50.0%
Interest-bearing debt as a percentage of common equity 69%
Current assets / current liabilities: 2.1
Liquidity and capital structure: The liquidity and capital structure are strong with good cash generation and a relatively modest debt level.
RETURN ON EQUITY AND ON MARKET VALUE  
Latest four quarters adjusted (if applicable) net income return on average equity: 14.9%
Latest fiscal year adjusted (if applicable) net income return on average equity: 14.7%
Adjusted (if applicable) latest four quarters return on market capitalization: 5.3%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE  
5 years compounded growth in sales/share 4.0%
Volatility of sales growth per share:  Steady
5 Years compounded growth in earnings/share 14.9%
5 years compounded growth in adjusted earnings per share 14.3%
Volatility of earnings growth:  Steady 
Projected current year earnings $millions: not available
Management projected price to earnings ratio: not available
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? Yes
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 10.6%
More conservative estimate of compounded growth in earnings per share over the forecast period: 5.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 9.0%
OUTLOOK FOR BUSINESS: We would expect relatively modest growth in the current fiscal year. The company is increasing focus on premium higher margin products now accounting for 43% of sales. The company is focused on achieving efficiencies through capital expenditures. The company has culled about 20% by discontinuing its weakest brands.
LONG TERM PREDICTABILITY: The company should continue to grow over the years although earnings growth may slow versus the level of the past five years. The company hopes that inter-provincial trade barriers will be reduced at some point but they do not think this is imminent at all.
Estimated present value per share: We calculate  $10.33 if adjusted earnings per share grow for 5 years at the more conservative rate of 5% and the shares can then be sold at a P/E of 14 and $15.59 if adjusted earnings per share grow at the more optimistic rate of 9% for 5 years and the shares can then be sold at a P/E of 18. Both estimates use a 7.0% required rate of return.
ADDITIONAL COMMENTS  
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (marginal pass as new players face the difficulty of establishing brand recognition). No issues with powerful suppliers (marginal pass as Ontario Grape growers sell through an association and there is only one suitable glass provider in Canada). No issues with dependence on powerful customers (marginal pass at best as provincial liquor agencies are major direct customers), No potential for substitute products (pass) No tendency to compete ruinously on price (marginal pass as some wines are certainly sold at discount prices). Overall this industry appears to be only marginally attractive according to these tests.
COMPETITIVE ADVANTAGE: The company’s established brands and the reputation of those brands provide some competitive advantage. It also operates wine stores which provide some advantage in terms of distribution. However, the company notes that it faces competition from low cost wine imports to Canada. And the company uses Canadian grapes for its premium wines while noting that imported grapes are cheaper.
COMPETITIVE POSITION: The company’s share of the Canadian wine market was 14.4% in 2016
RECENT EVENTS: In late 2017, the company acquired three wineries in B.C. for $97 million of which $77 million was cash and $19.1 million was paid by issuing shares. The dividend was increased by 13.9% in the summer of 2018 which was the fifth year of dividend increases.
ACCOUNTING AND DISCLOSURE ISSUES: There is an unusual feature whereby the earnings per share of the non-voting A shares are different from that of the B shares. As is often the case, the purchased value of brand names and customers is lumped in with software. There is an amortisation of purchased customer relations that could be adjusted for and that would add about 2% to the adjusted earnings. Some modest unusual expenses for a quality problem in 2016 and a failed acquisition bid in fiscal 2017 were not added back which is a conservative approach. The share count does not appear to be directly disclosed in the quarterly reports.
COMMON SHARE STRUCTURE USED: The main trading shares are non-voting A shares. The voting B shares also trade and have a dividend that is only 87% as large as the A shares and are considered to have an earnings per share that is 87% that of the A shares. Note that if there is a takeover offer for the voting B shares the non-voting A shares have “no right to participate” which is a negative factor for the A shares.
MANAGEMENT QUALITY: Management quality appears to be strong. We like the focus on ROE and book value per share and also its conservative approach to financing and to reporting adjusted earnings.
Capital Allocation Skills: The company appears to have a good history of prudent capital investment and financing. In fiscal 2016 it repurchased 100,000 shares from its family holding company at market and the share price has increased substantially since then. Winery acquisitions have also proven to be good investments.
EXECUTIVE COMPENSATION: Compensation for three of the five named officers is modest at about 400k to 500k and the President (an new position was at $1.3 million and the CEO at  $1.75 million. This level of compensations is not excessive for a company of this size and success.
BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. There are two family members on the Board, one of whom is the CEO, Two members represent investment companies, one is a management consultant and one is involved with a foodservice company. Overall this appears to be a  good board with strong representation from the founding family that controls the company.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
© Copyright:  InvestorsFriend Inc. 1999 – 2018  All rights to format and content are reserved.

s