By:
Dominic Delia, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Vina Concha Y Toro S.A. ADR (NYSE:VCO) is a vertically integrated,
international producer and exporter of wines headquartered in Santiago, Chile.
The company offers a diverse array of brands including Casillero del Diablo,
Don Melchor, and the Fetzer portfolio of brands.
• VCO’s most recent
earnings report revealed notably improved fundamentals and unprecedented margin
expansion, despite missing consensus expectations on both revenues (2%) and EPS
(3%).
• Recent industry
tailwinds are expected to subside in 2H16, after gross margins surprised on the
upside in Q216 due to lower grape input prices and foreign exchange benefits of
a weaker CLP.
• VCO’s recent achievement
as the only wine company included within the Dow Jones Sustainability Index
2016 personifies the AIM Program’s recent emphasis on ESG investing.
• With extremely low trading
volume catalyzing the majority of price fluctuation, VCO’s inevitable inclusion
on a major index should help to quell volatility.
Key
points: Concha y Toro’s
performance has remained relatively flat since it was added to the AIM
International Portfolio this past May. Its low trading volume has subjected the
stock to technically catalyzed movements in price and overshadowed the firm’s markedly
improved fundamentals. Despite these unforeseen headwinds, two of the original
drivers (Shifting Demographic Trends
& Overlooked Chilean Economy) have yet to play out, as these
macroeconomic factors tend to have much longer time horizons.
When Q2 earnings were
announced in late August, margins expanded (Gross Margin +170 bps along with
EBITDA margin +170 bps YoY) through both decreased input costs and massive
increases in volume across all facets of the business, most notably in Canada,
Mexico, and Asia. The recent acquisition of the Fetzer portfolio of brands is
also proving to be synergistic, with YoY sales volumes increasing by 12.1% and
showing signs of sustainable momentum.
Looking forward to 2H16,
VCO will need to rely on sustained volume growth domestically, as the Chilean
economy pulls itself out of recession and begins to expand, as well as in the Asian
and North American markets, after the tailwinds from a weak Chilean Peso and
depressed grape prices were realized in the first and second quarters of 2016.
What
has the stock done lately?
Over the past quarter,
Concha y Toro has seen an 8.40% increase in price ($31.74 to $34.36) from its
late June trough, as consumer staples had continued their rally into mid-August.
Despite a recent sector slowdown, the announcement of 2Q16 financial results
further buoyed the stock price, as YoY volume growth coupled with margin
expansions provided a pleasant upside surprise to investors.
The company recently
announced a new bond offering to pay down debt and increase capital
expenditures, demonstrating a focus on cleaning up the balance sheet while
preparing its facilities and vineyards for continued volume growth over the
next three years.
Past
Year Performance: Over the past twelve months, Concha y Toro has grown a meager 1.95%, while overcoming a 20% drawdown in 4Q15.
During this time, the Chilean economy was reeling as fears of a sustained
Chinese growth slowdown had driven copper (Chile’s main export) to historically
low prices. Chile has weathered the storm by slowly transitioning to a more
service based economy, and the company has reaped the benefits of the country’s
weakened currency in the meantime.
Source:
FactSet
My
Takeaway
Despite the stagnation of
global growth over the past year, Vina Concha y Toro has been able to grow its
brand presence globally as evidenced by the YoY volume growth in newer markets
such as Asia and Australia. Management adeptly positioned the company to take
full advantage of both commodity and currency tailwinds in 1H16, while
cementing the firm as a model for reputation and sustainability within the
industry. I recommend the fund continue
to hold Concha y Toro while patiently collecting the dividend and waiting for
my initial investment thesis to play out.
