Scheid Vineyards: An Extreme Undervaluation Hiding in the Dark - GuruFocus.com

Scheid Vineyards Inc. (SVIN) produces and markets wine. Its operations cover around 4,200 acreages, with 10 vineyards offering 29 grape varieties. For the first 15 years, Scheid was a grape farmer selling its harvest to wineries. The company was established in 1971 when Al Scheid acquired his first property in Monterey County.

The company went dark in 2016. Therefore, a 15-12G was filed with the Securities and Exchange Commission to avoid the cost and distractions of SarbOx compliance. The move was negative for shareholders as a going-dark transaction causes illiquidity from a reduced float and larger price spread. There is also difficulty obtaining financial data from a majority-owned and managed family operation.

The investment thesis is simple, but far from certain. The rationale is it is a deep discount to the sum of its parts with a future focus on improving existing operations using a branded wine product.

Price: $15.75
Enterprise value per share: $128.60
Market cap: $16.71 million
Enterprise value: $136.49 million
52-week range: $13.79 to $23.25
52-week change: -25%
Tangible book per share: 29.12
Price-to-tangible book: 0.52
Enterprise value-to-revenue: 2.58
Price-sales ratio: 0.25

I believe my numbers are accurate, backing into the market value using the shares outstanding. But multiple financial sites have different market cap values.

Google finance lists the market cap as $11.03 million, while Yahoo says it is $32.881 million, the over-the-counter market records it as $11.461 million and Morningstar shows it as $15.36 million and Reuters and $11.03 million.

I am bullish as it trades below intrinsic value, but recognize that offsetting the asset’s fair value is a capital-destroying family-held company. For example, shareholder equity declined 30.33%, or $11.206 million, over the prior 24 prior quarters. Earnings before interest and taxes aggregated over the same 24 prior quarters was -$10.564 million, while Ebitda was up $24.43 million.

Below is an attempt at a net asset value per share estimates. I started with reported book values (as of April 6) to arrive at an estimated fair market value. No market premium was placed on the existing operation (modern winery), but instead my guess at conservative market values in a fire sale.

Scheid Vineyards has a much higher vineyard acreage ownership to enterprise value versus its public peers.

Opportunities

In addition to Vineyards and a state-of-the-art processing plant, there is an additional 123 acres of non-agricultural land now zoned for residential development in Greenfield City, California. I would guess the market value is around $10 million to $15 million.

Its vision statement reads: “By 2025, Scheid Family Wines will become one of the most recognized wine producers in quality, innovation, and sustainability in the world.”

The assets trade at a fraction of market value. Appreciation from real estate and modern production facilities (new wind turbine power) provides an inflation hedge and cushion to help fund and stabilize as it further develops retail and commercial operations.

It is also undergoing a strategic shift to a branded business, emphasizing finished goods over selling inputs. I wrote my thoughts above before Friday’s announcement regarding the sale of three properties “for $33,000,000 in consideration, which includes the buyer assuming $20,000,000 of the Company’s debt that was secured by the properties.”

A positive valuation discount compared to its closest public peers: Crimson Wine Group Ltd. (CWGL), Willamette Valley Vineyards Inc. (WVVI), newly public The Duckhorn Portfolio Inc. (NAPA) and Treasury Wine Estates Ltd. (ASX:TWE). Further, Scheid’s multiples are near historical lows for price-boo and price-sales ratios and have a higher land and building ownership to its enterprise value.

The inventory book value is $53.08 per share. The recorded accounting value is below its fair market value. Scheid’s wine retails from $35 to $185 per bottle. Further, lower-margin sales for private labels sold in supermarkets such as Kroger (KR) as well as cruise lines and airplanes.

Risks

The grape business is risky; from planting to harvest, bottling, and customer sale, the weather, supply, and quality factors are out of Scheid’s control.

The fair market value of existing tangible assets is substantial. Still, it’s financially weakened from excessive debt issuance and interest expense over the years coupled with declines in gross margins, revenue per share, and multiple years of operating losses. The company continues to burn cash, reducing the terminal value of existing real estate holdings – a capital-destroying operation for the past decade.

While there is no evidence of any self-dealing, it is still a risk.

Catalysts

Management makes financial statements and operational transparency more accessible to the public. The market will slowly recognize its value.

After my original write-up, Scheid reported property sales on April 2. The press gave the stock visibility, and the price slowly reacted positively. The three properties represent a fraction of the company’s total asset ownership.

Scheid continues to have a focus on selling a branded wine over grapes. Hence, improving intrinsic value. To raise capital and improve market multiples, the company can arrange for a lease buyback or sales of vineyards and relist on the Nasdaq.

Disclosure: Long Scheid Vineyards.