Crimson Wine’s Steinberg Tells Shareholders ‘We Will Get Rich Together Slowly’

While catching up on some older items in my news feed, I came across a couple of pieces from Tsachy Mishal’s Capital Observer blog about 2013 Leucadia (LUK) spinoff Crimson Wine Group (CWGL). Mr. Mishal is a bullish Crimson shareholder and actually attended the company’s Annual Meeting in Napa. Boy, it must feel great to expense that trip as ‘research’! While I imagine most shareholder meetings to be rather droll events, Crimson’s meeting represented a rare opportunity to interact directly with management since Crimson, like Leucadia, doesn’t really do shareholder communication aside from SEC filings. Leucadia’s co-founders, Ian Cummings and Joseph Steinberg, are both involved with Crimson after lessening their responsibilities at Leucadia and Mr. Steinberg led the Q&A.This isn’t exactly Buffett-palooza with hundreds of people covering the event, so it’s nice that Tsachy shared some of his notes with the general public.

Mr. Mishal’s first question was related to a Napa Valley Register article where Crimson’s CEO Erle Martin stated an eye-catching goal of hitting $100m of revenue by 2016:

The first question I asked the CEO was about a newspaper article that quoted him as saying that he wanted to reach $100 million in revenue by 2016. He seemed to back off that statement and said that he wished he did not say it. In addition, Joseph Steinberg emphasized numerous times not to have too high expectations for the short term as progress in the wine business takes time.

Certainly an interesting response, especially considering the fact that I have seen several people use his ‘$100m’ statement as a starting point in constructing a valuation for Crimson. The thinking will go something along the lines of the CEO expects revenues of $100m in 2016, assuming they hit it in year X and achieve Y% margins, discounting it all back and so on and so forth. So much for that one? Maybe (like all management) he was just trying to lower expectations, but it’s worth remembering that it was a quote in a newspaper and apparently, not one he is proud of.

While that was potentially valuable information, it apparently wasn’t ‘the most important thing’ learned from the meeting:

The most important piece of information I came away with from the meeting was finding out why Joseph Steinberg believes Crimson is a good investment. Joseph Steinberg alluded to the private market value of the wine estates being well above the GAAP book value. He called Napa the Hamptons of the Bay Area and noted how much prices have gone up since they purchased the estates. He also noted that as the Hamptons of the Bay Area, Napa/Sonoma real estate prices are likely to continue to rise over time.

Many have questioned the motives as to why Messrs. Steinberg and Cummings spun off Crimson (the answer given at the Q&A: “because we wanted to”), but their performance at Leucadia has earned them quite a bit of respect. Leucadia isn’t a sexy company, but it did deliver excellent shareholder returns under their watch so it’s important to understand how they think about this investment. Contrary to the valuation approach mentioned above, this really looks at the company as more of a real estate/asset play. Of course, the illiquid nature of the assets and GAAP’s shortcomings make this a challenging exercise and there are still plenty of other risks – environmental changes/disasters, shifting wine tastes, operation issues etc. – as well.

Perhaps recognizing this, Barron’s noted a little while back that it’s not easy to value Crimson, but the asset/book value certainly seems like a very reasonable method for valuing this type of company. Using this approach, Mr. Mishal came up with a asset value of $15.50 for Crimson meaning there is a lot of upside to today’s price. Basically, the idea is that stated book value is not capturing the real value of several of the businesses. It’s a relatively short piece and worth reading in its entirety, but he summarizes his thinking at the very end:

The table below summarizes my estimate of the value of Crimson’s wineries:

Winery Value
Pine Ridge / Archery Summit $ 220,000,000
Seghesio Family Vineyards $ 100,000,000
Chamisal Vineyards $ 19,200,000
Double Canyon $ 10,000,000
Total $ 349,200,000
Adding my estimated land value to the $30 million in cash & investments Crimson will likely have at the end of this quarter yields a tangible book value of roughly $15.50, or a price 75% higher than the current quote.

It’s worth noting that he seems to think this value is more on the conservative side. Treasury Wine’s ongoing sale might eventually provide a decent comp, but they have had some operational issues and are a more geographically diversified company. 

Tsachy notes that Mr. Steinberg ended the meeting ‘with a vote of confidence for the stock telling shareholders “we will get rich together slowly”. Certainly not sexy, but that is an approach shareholders can really get behind.

Disclosure: Author holds no position in any stock mentioned.