Stock of the week: Andrew PellerStock of the week: Andrew Peller
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Andrew Peller Ltd. (TSX-ADW.A, $11.65) (formerly Andres Wines, a case
where a name change is no sign of trouble) is now profiting from the
integration of last year's acquisitions. The shares remain on buy for
gains and some income.
In the six months to Sept. 30, Peller earned $5.1 million, or 34 cents
a share, excluding one-time items. This is up by more than a fifth
from $4.2 million, or 28 cents a share, a year earlier. Based on its
results in the first half of fiscal 2007, we're raising our full-year
estimate to 75 cents a share (adjusted for the recent three-for-one
stock split). But this includes the favorable impact of a falling tax
rate.
In the first half, Peller's sales rose by 10.3 per cent, to $115
million. This reflected last year's acquisitions and organic growth.
Since the company made these acquisitions over a year ago, the rate of
sales growth will slow in the second half. Organic growth, however,
remains attractive. In fact, it hit 5.8 per cent in the second quarter
for several reasons.
First, Peller took steps to lift sales of its "premium and ultra-
premium" wines. Such wines generate higher profit margins - especially
with the company benefiting from past cost-cutting and economies of
scale.
Second, Peller is selling many new products through its more than 100
stores and provincial liquor stores. Since these products were
introduced only in late August, they should contribute more to sales
next quarter.
Third, Peller sold more through all of its distribution networks. This
includes supplying restaurants and bars plus selling consumer-made
wine kits, as well as through its own stores and provincial liquor
stores.
The cost of goods sold rose by only 9.6 per cent - less than sales.
That's because "fiscal 2006 margins were impacted by the Company
earning less margin on inventory acquired from Cascadia and Thirty
Bench due to the requirement to record the purchased inventory at fair
market value". Peller's gross profit margins are now free from this
accounting rule.
Peller's selling and administration costs rose by 9.5 per cent - less
than sales. While interest and amortization costs increased more than
sales, these are minor costs. The net result is that the company's
pre-tax profit jumped by 12.9 per cent and the pre-tax profit margin
rose by 15 basis points, to 6.7 per cent (a basis point is one per
cent divided by 100). Its tax rate fell by 3.9 percentage points, to
34 per cent. This further raised profit growth.
In the first half, Peller's cash flow rose by 19 per cent, to $8.8
million. This exceeded capital spending of $2.9 million and dividend
payments of $1.6 million. In fact, the extra cash flow makes the 18
per cent hike in the dividend even more affordable.
We would like to see Peller use excess cash flow to reduce its debt of
$97.4 million. While a debt-to-equity ratio of 1.05 to one is
reasonable given the company's dependable cash flow, lower interest
costs would leave more money for shareholders.
Peller's outlook is positive. President and chief executive officer
John Peller says, "we are beginning to see the cost savings and
operating synergies being generated by the acquisitions completed last
year. As we proceed with our integration initiatives, we expect these
benefits will increase". Also, sales of high-quality wines are growing
as the aging population's palates become more mature and the health
benefits of moderate drinking of red wine become known.
Andrew Peller remains a buy for gains and some income.
(Click below for a profile of this week's stock.)
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