Pat McKeough recently responded to a Member of his Inner Circle who requested his advice about a growing Niagara winery.
Diamond Estates Wines & Spirits has expanded from its Ontario base with the acquisition of a winery in British Columbia. Plus, the company is pursuing marketing initiatives in China, where Canadian sales may be aided by tariffs on U.S. wine. There are distinct growth possibilities in both Ontario and China, notes Pat, but there’s also expanding competition from a growing number of domestic and international firms.
Q: Dear Pat: Please give me your comments regarding Diamond Estates Wines & Spirits Inc. (DWS). Thank you.
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A: DIAMOND ESTATES WINES & SPIRITS (symbol DWS on the Toronto Venture Exchange; www.lakeviewwineco.com) produces, markets, and distributes wine and alcohol products. The company operates one winery in Toronto and two in the Niagara region of Ontario (where it is also based).
Diamond Estates produces both VQA wines (wines made of 100% Ontario grapes) and blended wines under several brand names. They include 20 Bees, EastDell, Lakeview Cellars, FRESH, Dan Aykroyd, and Seasons. Through its Kirkwood Diamond Canada (KDC) business, the company also acts as the sales agent for a portfolio of international wines and spirits. While the sale of wine under Diamond Estates’ own labels contributes 53% of its revenue, its agency unit contributes 47%.
The company’s overall revenue fell 12.0%, from $23.4 million in 2013 (fiscal years end March 31) to $20.6 million in 2014. It then recovered to $24.3 million in 2015 and $29.2 million in 2016. Powered by a 31.7% increase in revenue for its winery business, revenue rose a further 17.5%, to $34.3 million in 2017. In fiscal 2018, it was flat at $34.3 million.
Diamond Estates recorded annual losses from 2013 to 2016 before returning to profitability in 2017. Losses during that earlier time were $2.4 million ($0.17 per share) in 2013, $4.1 million ($0.09 on more shares outstanding) in 2014, and $1.7 million ($0.02) for both 2015 and 2016.
After two years of refinancing and restructuring under new management, the company returned to profitability in fiscal 2017. It earned $534,732 ($0.01) for the year. It was profitable again for fiscal 2018, although earnings fell to $27,177, or nil per share.
Penny stocks: Drop in wine sales at home and abroad lowers revenue and earnings
On June 20, 2018, Diamond Estates acquired Backyard Vineyards Inc., a winery in British Columbia, for $2.8 million. The company believes that this transaction transforms it into a national producer of VQA wines and positions it to build a new winery in British Columbia’s Okanagan Valley.
In its fiscal 2019 second quarter, ended September 30, 2018, overall revenue fell 8.3%, to $8.2 million from $8.9 million a year earlier. That decline was due to a drop in wine sales through exports and the Liquor Control Board of Ontario (LCBO). In addition, Diamond Estates’ agency division lost a supplier.
The company lost $429,548, or nil per share in the latest quarter. A year earlier, it earned $1,268, or nil per share.
The company, like all Canadian wine producers, faces the ongoing risk of poor harvests and even crop failure. It also faces competitive pressures from both domestic and international producers. Diamond Estates must also continue to contend with market regulation in Canada, and any further changes.
However, there are still growth opportunities in the Ontario wine market where VQA wines have only a 6.1% share of the market. This compares to the more than 70% share that local producers hold in other domestic markets. With a record harvest in 2017, Diamond Estates was able to reintroduce several products to the LCBO that had been temporarily de-listed because of limited supply. It expects a return to full distribution shortly.
As well, China represents an opportunity for the company as demand for imported wine there continues to grow. The imposition of Chinese tariffs on American wine imports—in retaliation for “Trump tariffs” on Chinese goods—could also lift sales for Canadian wine producers selling to the Asian country. Diamond Estates is actively exploring and developing this market opportunity. This includes selling to stores in China through a distributor.
As of September 30, 2018, the company’s long-term debt was $20.1 million. That’s down from $30.6 million in 2015, but it still represents a high 59% of Diamond Estates’ market cap.
The stock trades at 23.0 times this year’s forecast earnings of $0.01 a share. The company does not pay a dividend.
Inner Circle recommendation: Diamond Estates is okay to hold, but only for highly aggressive investors.
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