Stock Analysis: Corby Spirits & Wine

Despite sounding drunk and looking generally like a little bit of a sloppy mess, your author has evolved into basically a teetotaler.

Take a recent Mexican resort vacation as an example. It was hot, we were sitting by the pool, and the waiters kept bugging me, dammit. So I got a vodka and a Diet Coke. (Diet Coke because I’m healthy, see) Since we had spent a little extra to end up in some VIP area, my drink was basically half vodka and half mix. I drank it, immediately felt some of the effects (I’m a lightweight, see?) and decided to stick to water for the rest of the trip.

This isn’t a new attitude, either. After a brief flirtation with alcohol immediately after I turned 18, I decided I wasn’t going to touch the stuff. I didn’t like the type of person I turned into after a few drinks, but that wasn’t the most important reason. Alcohol was expensive and it didn’t mesh really well with my financial goals - which was to accumulate as much money as possible in the shortest time period I could.

Also, I worked at a 24-hour grocery store located immediately across the street from a bar that had $1 highballs on Thursday night. We’d get a flood of drunk guys coming over for post bar snacks. I’ve had to break up fights in the aisles, chase down shoplifters, and call 911 for guys who were so drunk they passed out.

I was alone in a world where all my peers thought overindulging in alcohol on a regular basis was a good idea. Most of the time this suited me just fine. I’d show up at the bar at 8pm when the night was just getting started, have a soda or two, and feign some sort of excuse at 10:30 when things started to get silly.

Let’s connect this with investing, because this is an investing site here. Even though I’m not a drinker, there are millions of other people who are. It’s also a pretty good business, as this long-term stock chart of the largest spirits manufacturer Diageo indicates:

Not bad, especially when I tell you that price chart doesn’t include dividends.

Since this is a Canadian stock blog, let’s talk a little about Diageo’s little cousin Corby Spirits and Wine (TSX:CSW.A)(TSX:CSW.B).

The skinny

Corby is a majority owned subsidiary of the Hiram Walker & Sons company, which has been producing whiskey in its Windsor, Ontario distillery for more than 160 years. The Windsor facility is something of a big deal in the alcohol world, a place where the age of the facility producing spirits matters for some reason. Hiram Walker is, in turn, owned by Pernod Ricard, which is a publicly traded company out of France.

Most of Corby’s brands are produced at this facility. Prominent brands Corby either owns or has exclusive rights to distribute in Canada include J.P. Weiser’s, Absolut Vodka, Jameson, Jacob’s Creek, Malibu, Kahula, and others I’m too lazy to type out. There are dozens of different brands that I’m sure are readily available at your local liquor store.

Corby is divided into class A shares (which Hiram Walker owns) and class B non-voting shares, which is where the rest of us plebs hang out.

There’s a small risk to this relationship, since Corby doesn’t own its own production facility. The big ownership stake of Hiram Walker protects investors against this relationship souring. Still, the current contract is in place until 2026, and there is a small chance negotiations could go poorly for Corby shareholders. We should also note Corby paid $56M to for the right to manufacture Pernod Ricard’s brands for the five-year period between 2021 and 2026, and will likely have to pay a similar amount in 2026 (or 2029 if certain targets are hit that automatically trigger a three-year extension).

Most provinces have government controlled liquor stores, with the prominent exception of Alberta which loves freedom, baby. This makes the relationship with retailers relatively simple. There’s really only one person to talk to. It also ensures there isn’t silly discounting going on, which leaves excellent margins for both the manufacturer and for taxpayers.

It’s been a pretty good business during COVID, even though the pandemic ravaged Corby’s restaurant and airport business. Here’s a three year snapshot. Remember, Corby’s year end is June 30th:

Canada is a mature market, and volumes reflect that. They’re essentially flat over the last few years, with the only growth from this country coming from price hikes. The international business (which is exporting to the United States, really), is leading the growth charge. Take a look at these 2021 numbers:

More recent results have been mixed. Revenue is up thanks to price increases passed onto customers, but costs have accelerated at a faster pace. Adjusted revenue was up 4% in its most recent quarter, but costs ballooned 11%. That resulted in a 17% decrease in quarterly earnings and a 10% decrease in YTD earnings.

The opportunity

We shouldn’t let short-term issues take away from the bigger picture. Corby is an excellent business that’s just suffering from some temporary problems.

Let’s take a look at 2021’s overall numbers. Revenue was $159M. Net income came in at just over $30M. That works out to 20% net margins, which is excellent. That works out to earnings of $1.07 per share.

Free cash flow is even better. Once you adjust for the amortization of the contract and other non-cash expenses, I’m putting free cash flow at approximately $40M.

Corby has a current market cap of $474M, putting the stock at right around 12x free cash flow. That’s a very reasonable price to pay for this caliber of business.

Corby also has a cash rich balance sheet, putting total enterprise value at approximately $430 million. That gives it an EV/free cash flow ratio at approximately 11x. Again, a very reasonable valuation.

Much of the bull case here comes from multiple expansion. Let’s compare to Diageo for a minute. Both offer approximately the same net margin percentage (20%), similar long-term growth rate (5%) and portfolio of diverse spirits brands. Diageo earned $1.30 per share last year. Corby didn’t quite earn that much, but it still earned $1.07 per share.

Diageo trades at $36 on the London Stock Exchange. Corby’s class B shares are currently struggling to maintain a $15 price point.

Or, to put it another way, Diageo trades at 27x trailing earnings. Corby checks in at around 14x earnings - or around half Diageo’s valuation.

I’m the first to argue Corby shouldn’t be worth what Diageo is worth. But I also believe it should be worth more than 14 earnings.

It has been worth more than that in the past. In 2016, the stock earned approximately $0.90 per share. The shares spent most of 2017 at above $20. That puts the trailing P/E firmly above 20x. I think a high teens P/E multiple is very reasonable. Sure, there’s not much growth. But it’s a pretty solid business.

Finally, I’ll talk about Corby’s dividend. The long-term trend has been one of dividend growth, but the board took the odd step of cutting the dividend from $0.88 in 2019 to $0.86 in 2020 to $0.84 in 2021. I’m not really sure why. Did it make any difference at all?

The payout has since been boosted to $0.24 per share each quarter ($0.96 per share annually), which reflects the needs of the business. Corby is a mature business that doesn’t see huge amounts of growth. So it can afford to pay a generous dividend to shareholders.

The current yield on class B shares is a hair over 6%. I’m confident this dividend increases by 2-4% annually (on average) for a long time.

The bottom line

The big risk for Corby is spirits and wine getting hit in the same way beer has in the past decade. Beer consumption has steadily gone down as large brands were first displaced by craft beer and, more recently, by hard seltzer.

I don’t see such a future for Corby. There’s nothing to indicate spirit consumption is about to fall. And the company made it through COVID just fine. Changing consumer tastes is always a risk, but I don’t see much there.

The bigger risk might be on the craft side. It seems like every city has a half dozen local distilleries. These companies may collectively take some market share away. In fact, Corby is doing just that in a way with its U.S. export business.

I like the stock today. I think the company makes it through its short-term issues and emerges in a few years with profits comfortably above $1 per share and a stock price in the $18 - $20 range. It’s not as much short-term upside as last week’s idea, but it’s a solid company that you can buy today and tuck away for a very long time.