The following commentary was originally posted on FoolFunds.com, the website of Motley Fool Asset Management, LLC.
Picture it: a sunny, 70-degree day, the Vaca Mountains sloping up in front of you, the leaves on the trees starting to tint orange, and a map of the Napa Valley marked with remarkable vineyards to visit and a bike waiting to take you to them. This sounds like the perfect fall day. A time to cherish, remember, and spend with the one you love.
And it might have been ... if I hadn't been there with portfolio manager Bill Mann.
Filed under "hard work, but somebody has to do it," this was a visit to stress-test our thesis on Crimson Wine Group -- a vintner spun out from Leucadia National earlier this year, when that company merged with investment bank Jefferies. (Crimson is a holding in one of our portfolios.) The idea behind this investment is best summarized by a line from value investor Mohnish Pabrai's The Dhandho Investor, which is: "Heads I lose; tails I don't lose too much." For Crimson Wine, the stock could rise significantly as global wine demand continues to grow and the company continues to scale and make highly acclaimed wines that result in rising sales and fattening profit margins.
On the other hand, winemaking is a notoriously fickle business that is generally unkind to smaller players. The reality exists that Crimson's brands may not catch on or that a bad harvest or vintage impairs the balance sheet. In that case, the stock could drop sharply.
Unique agricultural assets
But backstopping Crimson's stock price is the value of its property -- specifically some 150 owned acres in the acclaimed Stag's Leap, Los Carneros, Howell Mountain, and Yountville American Viticultural Areas (AVAs). We suspected the value of these acres exceeded the less than $10 million they were carried at on the company's balance sheet, and an exhaustive search of online real estate listings and property tax records confirmed this view. But how much more remained a legitimate question, so we ventured out on bike (not a tandem, though that might have been cute) to identify the most relevant comps, visit properties for sale to assess their condition, and get a better feel for wine industry experts assess acreage in the Napa Valley.
This is the "tails I don't lose too much" side of the scenario. In the event Crimson fails to make a successful go as a winemaker, we are confident that there are many well-capitalized players that would be champing at the bit to acquire Crimson's unique agricultural assets. Foremost among those assets in the 50-acre Pine Ridge vineyard, located at 5901 Silverado Trail, are a massive wine cave and hospitable tasting room that's worth checking out if you are in the area. Carried at $50,000 per acre, it's tax-assessed at $115,000, with a market value probably in the range of $250,000 to $400,000 per acre, based on conversations and comps we collected. Among the other intriguing properties are 70 acres on Whitehall Lane in St. Helena that are assessed at less than $100,000 per acre, while neighboring commercial vineyards are valued at or on sale for $200,000 to $300,000 per acre. And then there are the company's 9 acres on Las Posadas Road in Angwin, part of the Howell Mountain AVA. Though it's a small property, we were struck by just how good its wine is (yes, we did some tasting), as well as by the limited supply of land for grape-growing around it. Given that scarcity, Howell Mountain could become quite a valuable little property -- though if you choose to visit it, note that the 2,000-foot-climb up Howell Mountain is for serious MAMILs only.
All told, we believe Crimson continues to offer significantly more upside to common shareholders than downside risk, which is why it is a growing part of our portfolio. Although we aren't necessarily rooting for an acquisition bid or a sale of the company's assets, shareholders in either event probably stand to receive value in excess of the current stock price.
A visitor's guide
Tired of wine? Don't miss Russian River Brewing in Santa Rosa and its acclaimed Pliny the Elder Double IPA. It has an all-day happy hour on Sunday and TVs on which to watch your favorite game. You're welcome.
Disclosure: Tim Hanson does not own shares in the companies mentioned.