When the economy suffers, consumption of wine and spirits tends to go up. So, should investors take a look at the companies that produce alcohol in these uncertain times?
The shares of these producers have fallen along with the broader market in the past few weeks and are near their 52-week lows. But in good times and bad, there’s always demand for alcohol, which means a sound business and good cash flow.
“It’s true, the [wine and spirits] companies have sold off, but the valuations are compelling for different reasons,” says Nick Corcoran, an equity research analyst with Acumen Capital Finance Partners Ltd. in Calgary, which covers niche and small-cap Canadian companies.
He says the four Canadian publicly-traded companies in the sector hold promise for different reasons. But he also admits this downturn is different.
Bars and restaurants, which are a big source of demand for alcohol, are closed. Special events and dinner parties are being conducted over videoconferencing. And while sales may be up at liquor stores, consumers will have less money to spend as job losses pile up.
The two publicly-traded winemakers in Ontario – Diamond Estates Wine & Spirits Ltd. (DWS-X) and Andrew Peller Ltd. (ADW-A-T) – are benefiting from the Liquor Control Board of Ontario (LCBO), which centralizes sales and distribution in Canada’s largest alcohol market, thus cutting their costs. They’re also helped by the province’s decision last year to allow wine and beer sales in grocery stores.
“Given the circumstances, sales are holding up quite well,” says Murray Souter, chief executive officer of Diamond Estates, which is based in Niagara-on-the-Lake, Ont., and includes brands like Twenty Bees, EastDell and Lakeview Cellars. “If people can’t go out to a restaurant to eat, they still want to enjoy a glass of wine with dinner.”
Diamond Estates had revenue of $25.9-million in its latest 12 months. Mr. Souter says half of these sales come through the LCBO’s retail stores and grocery stores. The grocery store business has helped offset the sales losses from now-closed bars and restaurants,
Another quarter comes from conference and wedding venues as well as vineyard tastings and exports. Mr. Souter says Diamond Estates worked hard to build its export sales to China, but has seen that hurt by the COVID-19 pandemic. Still, he remains optimistic.
“Overall sales are down, but that could change very quickly,” Mr. Souter says.
Mr. Corcoran says Diamond Estates, Grimsby, Ont.-based Peller, as well as Kitchener, Ont.-based Waterloo Brewing Ltd. (WBR-T) and Corby Spirit & Wine Ltd. (CSW-A-T) of Toronto have their challenges and appeals.
All four have turned over some of their alcohol production to producing hand sanitizer, which is being distributed free of charge in their communities and to front-line health-care workers.
Peller is Canada’s second-largest wine producer with sales of $381.8-million in 2019. It has paid dividends for 41 years with the last increase in July. The stock yields 2.8 per cent at current prices.
“It is a great, well-managed company,” Mr. Corcoran says.
Its top brands include Peller Estates, Thirty Bench and Trius. Mr. Corcoran says Peller’s VQA wines are doing well, although its blended wines are under pressure from low-priced imports. Like Diamond Estates, exports have been hurt.
Mr. Corcoran also likes Waterloo Brewing because it sells a range of premium and value-priced beers and is moving into the pre-mixed cocktail segment. Waterloo Brewing had revenue of $50.1-million in 2019 and its 10-cent dividend yields 3.8 per cent.
Its beers include Waterloo Brewing, Landshark and Laker, but it also makes pre-mixed alcohol based drinks including Seagram Coolers and Mott’s Caesar. In December, it added pre-mixed Absolut vodka drinks.
“Waterloo has done a great job of building out its brands and the ready-to-drink market should help drive future growth,” Mr. Corcoran says.
Corby was founded in Corbyville, Ont., in 1859 but is now controlled by the France-based beverage giant Pernod Ricard. Its brands include J.P. Wiser’s Canadian whisky and Lamb’s rum. Through Pernod Ricard, it represents global brands including Absolut vodka and Beefeater gin as well as Jacob’s Creek and Campo Viejo wines.
Corby had revenue of $149.9-million in 2019. Its $1.32 dividend yields 5.7 per cent.
Daniel Sacke, vice president and wealth advisor with The Sacke Wealth Advisory Group at BMO Nesbitt Burns Inc. in Toronto, says wine and spirit companies are selling close to their 52-week lows, a similar pattern to the 2008 financial crisis.
“They’re not recession proof, but they are recession-resistant,” he says.
Mr. Sacke prefers large-cap companies in the current environment because their shares are more liquid and the companies have the scale and deep pockets to withstand setbacks.
He recently purchased Constellation Brands Inc. (STZ-N) of Victor, N.Y., for clients. Constellation’s brands include Robert Mondavi and Kim Crawford wines, Svedka Vodka and Casa Noble Tequila. It has also has a stake in cannabis producer Canopy Growth Corp. (WEED-T) of Smith Falls, Ont. Constellation has a market cap of US$28-billion and its US$3 dividend yields 2.06 per cent.
“I like [Constellation because it] has sustainable levels of debt and a sustainable dividend. But for somebody in the micro-cap space, both Peller and Corby might be attractive,” Mr. Sacke says.
(This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Apr.14, 2020.)