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Unformatted text preview: Please refer to page 9 of this report for detailed disclosure and certification information. INDUSTRY UPDATE Institutional Equity Research F OOD & B EVERAGE I NDUSTRY U PDATE October 19, 2007 Prices: 10/18/07 Industry: Food & Beverage Timothy S. Ramey, CFA 503.603.3027 [email protected] Theresa M. MacPherson Research Associate 503.603.3049 [email protected] The Wine Market Keeps Powering Along One of the reasons we have BUY ratings on both Constellation Brands and Brown- Forman is the powerful category growth we see in branded wines and spirits. Recently published data suggests that nothing is slowing down in the wine business, at least across the scanner at grocery stores (approximately 40% of the wine market). Wine sales for the 13 weeks ending August 25 th powered higher with dollar sales growth of 8.6% and unit growth of 5.1%. Red wines appear to continue to benefit from the recent positive health publicity on the benefits of Resveratrol, a compound contained in red wines. Sales in this category rose 12.4% in dollars and 9.6% in units. Pinot Noir (Oregon’s favorite) rose 30%, Zinfandel grew 17%, and Cabernet grew 15.5%. White wines are growing as well, but at a slower pace . White wines grew 6.5% in dollars and 3.5% in units. This reinforces our view that a big chunk of the growth in premium varietal wines is driven by the positive health benefits of red wines. The wine sector is short the dollar. Virtually all of these numbers reflect dollar sales significantly ahead of case sales – i.e. pricing. We believe the wine sector is functionally “short the dollar.” Import prices are rising given the weakness in the USD versus the euro. This gives pricing leverage to domestic producers as well. Also, the bulk wine market is firming up thanks to a difficult Australian harvest in 2007 and another one expected in 2008. Imports were strong , up 9.6% versus 8.2% for domestic brands. Also, higher price points continued to support higher growth. Wines in the $12-$15 price point grew 18.4% in dollars and 16.4% in volume. Wines above $15 grew 17.1% in dollars and 16% in units. Constellation Brands suggested on its last earnings call that the wine market is shifting from a global oversupply to a balanced or slightly tight supply situation. We continue to believe this bodes well for branded producers like Constellation Brands and we reiterate our $32 price target on the shares. Brown-Forman benefits as well, though the majority of its exposure remains to spirits. Our price target on Brown-Forman remains $84. D.A. Davidson & Co. 2 BUY Rated Companies EPS was $0.02 below our estimate, $0.01 below Street consensus. Brown-Forman reported GAAP EPS of $0.77 versus $0.76 last year. However, we would call operating EPS $0.80 versus $0.76, below our $0.82 estimate (excluding $0.03 of non-cash and other non-operating charges relating to the Herradura acquisition). The primary variance from expectations was a more pronounced seasonality to the tequila business. more pronounced seasonality to the tequila business....
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This note was uploaded on 02/20/2009 for the course AEM 241 taught by Professor Grossman during the Spring '08 term at Cornell University (Engineering School).
- Spring '08