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Champagne makers' stocks are bubbling up

Grape production limits and increasing demand spur a shortage of the French sparkling wine.

January 02, 2008|Ladka Bauerova | Bloomberg News

When New Year's Eve revelers popped the cork on a limited-edition $1,150 bottle of 1996 Krug Clos du Mesnil champagne to celebrate the arrival of 2008, investors were partying alongside.

A looming shortage of the bubbly French wine, spurred by limits on grape production and rising demand in the U.S., Japan and Britain, will push shares of champagne producers higher. LVMH Moet Hennessy Louis Vuitton, the world's largest champagne maker, will advance 21% within the next 10 months, according to the median estimate of nine analysts surveyed by Bloomberg.

Smaller producers may also gain, with Boizel Chanoine Champagne estimated by analysts to increase 14% and Vranken-Pommery Monopole 15%.

"If the champagne craze continues at the current pace, winemakers won't be able to satisfy demand and prices will skyrocket," said Laetitia Delaye, an analyst at Landsbanki Kepler in Paris, who has been following French beverage companies for three years. "That can only be good for the stocks."

Champagne sales as a whole will rise as much as 5% this year, said Arnaud Guerin, an analyst at brokerage Portzamparc in Nantes, France. Guerin calls his estimate conservative and advises investors to buy Boizel, Laurent Perrier and Remy Cointreau. Prices may rise "much higher" after 2010, Guerin said, as the industry undergoes a "radical transformation."

The value of champagne sales has almost doubled since 1988 while the number of bottles produced has risen only 23%. Demand will outstrip supply by 2010 as the final available plots in Champagne's rigidly controlled vineyards are cultivated, Delaye said. At that point, there will be no more inventories of wine aged more than 3.3 years, the threshold for quality champagne.

The fizzy wine can be produced only in the 34,000-hectare (84,000-acre) Champagne region under strictly defined rules that include producing no more than 15,000 kilos of grapes per hectare. The limits are designed to avoid lowering the quality or price of the wine, according to Epernay, France-based Comite Interprofessionnel du Vin de Champagne, an industry group.

Champagne shortages will lead to consolidation in the $3.38-billion industry as bigger producers snap up cheaper brands to increase volume, according to Remy Cointreau Chief Executive Jean-Marie Laborde. The bigger, publicly traded winemakers are likely to buy smaller, private producers to secure their supply, Guerin said.

Weakness of the U.S. dollar and Japanese yen against the euro hasn't deterred consumers, said Yves Dumont, chief executive of Laurent Perrier, the fourth-largest producer of champagne. The company's Japanese sales were up 40% last year as customers snapped up 70,000 yen ($620) bottles of 1998 Grand Siecle even as the Japanese currency dropped against the euro.

"The Japanese love luxury products," Dumont said during an interview in his company's Paris office near the Arc de Triomphe. "We sell huge amounts of our best brands -- Rose and Grand Siecle."

Rising demand means the gains by champagne producers last year are far from over and that LVMH is cheap versus its peers, said Laurent Belloni, a fund manager at Geneva-based Pictet & Cie, which has about $373 billion under management.

"Champagne is a good investment because most of its top-line growth is coming from the pricing rather than from volume," said Belloni, who owns shares of LVMH, Laurent-Perrier, Remy and Pernod Ricard. "A champagne brand is like a crown jewel in a company's portfolio. The demand is just there and it won't go away."

LVMH, better known for its monogrammed handbags and as the owner of fashion label Marc Jacobs, is undervalued when its drinks division is compared with other beverage companies, Belloni said. The Paris-based company trades at 20.7 times earnings, while Boizel trades at 38.6 times. Remy Cointreau trades at 22.97 estimated earnings per share.

Sales of LVMH's champagne brands, which include Dom Perignon, Moet & Chandon, Krug and Veuve Clicquot, account for about a quarter of sales at LVMH's drinks unit, or about 5% of the company's overall revenue, he estimates. Operating profit as a percentage of sales exceeds 40%, better than the rest of LVMH's business, he said.

Grape prices rose 10% in the last two years, said Laurent-Perrier's Dumont. The company's operating expenses rose 8.3% in the last fiscal year, while operating profit rose 35%.

The shortage of bubbly is leading industry group Comite Interprofessionnel to rezone the region to increase production. The group may add as many as 40 municipalities to the Champagne appellation in 2010, spokeswoman Brigitte Batonnet said. Output won't rise until 2020 because of the time it will take to replant vineyards and age the wine, she said.

Inexpensive alternatives to champagne have faltered recently. Spain's Cava region in Catalonia exported 4.3% fewer bottles of sparkling wine in 2006 than the year earlier, according to the website of the industry regulator Consejo Regulador de Cava based in Vilafranca del Penedes, near Barcelona.

"I'm not concerned that sparkling wines could really compete with champagne," fund manager Belloni said. "Consumers know the difference. They know that champagne is special. When people want to celebrate they always reach for a bottle of champagne."

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