Description

Overview

Crimson Wine Group (CWGL) is a Napa, California-based producer of high-end wines.  It owns 6 vineyards on the West Coast of the U.S.: 2 in Washington, 1 in Oregon, 2 in southern California, 1 in Sonoma, and 1 in Napa.  The Napa vineyard, Pine Ridge, comprises the bulk of the value.  Leucadia bought Pine Ridge from the FDIC in 1991 and has added the other vineyards over the years.

History

CWGL was a spinoff from Leucadia National (now Jefferies) in early 2013.  When Leucadia and Jefferies merged, Jefferies management had no interest in the wine business and Leucadia leadership (Ian Cumming and Joe Steinberg) thought it was valuable, thus the spinoff.  The price at spinoff was $8.05/share and the stock has traded in a narrow range since and is currently at $9.24/share.

Book value per share has grown from $8.30 in 2013 to $8.87 in 2018 Q1 as the company has been modestly profitable each year.  Sales have grown from $56 million in 2013 to $63 million in 2017.

CWGL has been written up twice on VIC, in August 2014 by nassau799 at $9.20/share and in December 2016 by cuyler1903 at $9.35/share.

Thesis

I believe that CWGL will be sold at some point at a price far above its book value.  I have no idea on the timing.  I think long-term downside is minimal due to the asset value.

Steinberg has stated publicly over the years that the private market value of the vineyards, specifically Pine Ridge, are far in excess of book value.  Pine Ridge was purchased in 1991 and real estate prices in California have gone up considerably since then.

To cite one example, Duckhorn Wine Co. based in Napa, was sold in 2007 for $250 million to a private equity firm, and then sold again in 2016 to another private equity firm, TSG Consumer Partners, for an estimated $600 million in 2016.  Ian Cumming (recently deceased, RIP) specifically cited Duckhorn at the 2008 Leucadia annual meeting, saying, “It’s amazing, Duckhorn is for sale for $300 million and they earn $5 million.”

Steinberg and John Cumming (son of Ian Cumming) each control 2.6 million shares and have consistently purchased shares over time.  Steinberg has been a consistent buyer this year at levels similar to the current price, adding almost 90k shares YTD and buying on what looks like almost every day he can.  Cumming added over 108k shares at $9.31 in late May.

There is no reason for them to buy shares other than the prospect of financial gain.  They built the company from the ground up over almost 30 years and are very financially savvy.  Steinberg is a self-made billionaire and didn’t just fall off the turnip truck.

I suspect this idea will prove unpopular because there is no catalyst and it’s not a great business.  Owning it is like watching paint dry.  Vineyards are trophy assets.  I see no reason that will change anytime soon.  They are not building any more land in the Napa Valley, people continue to grow and drink wine as they have for thousands of years,  and the growth in wealth at the high end in the Bay Area has been mind-boggling and shows no sign of slowing.

Steinberg recognizes that, and just because they haven’t sold yet doesn’t mean they won’t someday.  Plus, I think the insider purchases indicate they aren't just asleep at the wheel.  As they wrote in the 2009 Leucadia letter about Crimson Wine Group, “Durable annual cash flows may be difficult to achieve, thus the ultimate judgment on our investment will have to wait until it is eventually sold.”

What I think will happen is that the stock is going to bump along at prices similar today and then one day shareholders are going to wake up and find a 40% pop on a sale.  I wouldn’t make this a big position, but I much prefer it to holding cash.

Catalyst

Sale of company.