Chile Wine in Asia Boosts Concha & Toro as Europe Shrinks

Vina Concha & Toro SA’s effort to reduce its reliance on Europe is helping the maker of Casillero del Diablo merlot rebound from its cheapest valuations in eight years as analysts predict the stock will outperform peers.

Concha & Toro shares have climbed 1.1 percent since July 19, when the vintner’s price-to-earnings ratio reached its biggest discount to the benchmark IPSA index since 2004. The stock will jump 19 percent over the next 12 months, according to the average of four analysts’ estimates compiled by Bloomberg, the most among 10 Latin American beverage companies.

Chile’s biggest wine exporter will report a second consecutive quarterly decline in earnings after Europe’s debt crisis cut sales in its biggest market and a drought reduced grape yields last year, according to analyst estimates compiled by Bloomberg. Sales in Asia tripled in the past five years, part of a strategy to reduce dependence on Europe that helped prompt Rodrigo Rojas, who manages Chile’s best performing equity fund this year at Santiago-based Celfin Capital SA, to buy the stock.

“I like what Concha & Toro is doing to reduce exposure to developed markets and increase sales to emerging markets,” Rojas, whose $17 million Celfin Chile Accion fund has gained 13 percent this year, said in an interview yesterday. “With the shares near 900 pesos, it showed an interesting entry point.”

The fund doubled its Concha & Toro holdings in July to 536,000 shares, from 253,000 at the end of June, according to data from Chile’s securities regulator.

40% Discount

The stock, which rose 0.7 percent to 938.19 pesos today at the close in Santiago, trades at 13.9 times trailing 12-month earnings, 28 percent below its four-year average of 19.2 times. The stock traded on July 19 at a 40 percent discount to the benchmark Ipsa stock gauge, the biggest since 2004, according to data compiled by Bloomberg.

Concha & Toro got 33 percent of its sales from Europe in the first quarter, down from 38 percent in the same period a year earlier. It increased the percentage of sales to Asia to 8 percent from 6.8 percent. The International Monetary Fund forecasts emerging Asian economies will expand 7.1 percent this year, compared with a 0.3 percent contraction for the euro area, where a sovereign debt crisis is curbing growth.

The company sold 1.8 million cases in Asia last year, up from 573,000 in 2005, according to a presentation on its website. It opened an office in Singapore in 2010 to oversee sales in the region, the website shows.

California Wines

The vintner’s $234 million acquisition of California winemaker Fetzer Vineyards last year bolstered its U.S. revenue to 22 percent of total sales in the first quarter from 12 percent a year earlier.

The press office at Concha & Toro declined to make Chief Executive Officer Eduardo Guilisasti or Chairman Alfonso Larrain available to comment. The company said by e-mail that it will report second-quarter results tomorrow or Aug. 27.

Earnings and profit margins will begin to improve in the third quarter as a bumper harvest leads to lower prices for fruit and bulk wine and the company recovers from an 8.8-magnitude temblor in 2010 that smashed casks holding 125 million liters of wine industrywide, according to Ramon Lagos, a Santiago-based analyst at Banco Penta SA who says Concha & Toro is part of its portfolio of favorite stocks.

Chile’s grape harvest rose 20 percent in 2012 to produce a record 1.26 billion liters of wine, Chile’s agricultural statistics agency Odepa, said in July. Concha & Toro relies on external grape producers for 65 percent of its premium, varietal and sparkling wines, according to a regulatory report.

Buy Recommendations

“Concha & Toro is a well-liked company in Chile, but it was affected in the last two years by the earthquake,” Lagos said in an interview. “Margins are expected to improve as this year’s harvest has been much better.”

Five analysts have made new or reiterated buy recommendations for Concha & Toro shares or American depositary receipts within the last three months, while two have hold ratings and one a sell, according to data compiled by Bloomberg.

“With higher sales volumes and if the exchange rate remains stable, Concha & Toro should show efficiency improvements,” Ignacio Spencer, an analyst at Santiago-based brokerage IM Trust, said in a phone interview Aug. 20. He rates the stock buy with a price target of 1,149 pesos.

Concha & Toro is the biggest winemaker in Chile, with about 30 percent of the market in 2011, according to a company presentation. The company said in April that it planned to invest $60 million to add 540 hectares (1,334 acres) of grape plantations this year.

Profit Margins

Concha & Toro’s earnings excluding certain items probably fell 19 percent in the second quarter to 7.74 billion pesos ($16 million), according to the average estimate of three analysts surveyed by Bloomberg.

Concha & Toro said July 6 that preliminary second-quarter sales rose 6.8 percent from a year ago to 108 billion pesos, with a 6.3 percent increase in export volumes to 42.2 million liters.

Publicly traded Chilean wine producers have reported an average 58 percent drop in operating margins since the third quarter of 2008, when the financial crisis began, to the first quarter of this year.

The strength of the Chilean peso may continue sapping profits of exporters, including Concha & Toro, according to Gabriela Clivio, an equity strategist at Santiago-based asset management firm Vantrust Capital. The peso is the world’s second-best performing currency this year, rallying 7.8 percent.

“The stock is still near historic minimums, so some can say it’s cheap, but I don’t see a short term catalyst as there still is just too much concern about the situation in Europe,” Clivio said in a phone interview Aug. 20.

Celfin’s Rojas said that even with the European headwinds, as long as second-quarter sales aren’t “drastically” below forecasts, the stock will be poised for gains.

“At this price it remains as one of the bets in our portfolio,” Rojas said.

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