A sober analysis of Duckhorn Portfolio suggests that shorts must be smoking something...

A crowded short with a strong balance sheet and resilient economics in a Lindy industry

Dear Reader,

There’s a popular Twitter account with an extremely bearish outlook on NAPA 0.00%↑ — the Duckhorn winery portfolio. She is saying that it’s either a 0 or a buyout at around $2.50-$3.00. I think it’s absolutely ridiculous to be talking about bankruptcy here, and after running some conservative numbers I am interested to get long post-earnings; ideally we can buy into a puke lower, but I’m also open to getting long at this valuation if financials stabilize.

Like Marcus, this is a name in a beaten-down, cyclical industry that has maintained a strong balance sheet plus makes money. Further, both cinema and wine have their “lindy” status in question recently — for wine, due to GLPs and shifting generational preferences in alcohol consumption. (For what it’s worth, I think that wine is more likely to bounce back than cinema. )

Balance Sheet

First of all, let’s address the balance sheet. NAPA 0.00%↑ has ~$450mm inventory versus a typical inventory of ~$300mm. At ~50% typical gross margins, the potential for working capital to unwind versus ~$200mm debt is enormous even with heavy discounting. Such massive working capital unwinds are often very bullish catalysts in the oilfield services sector.

Operating History + Recent Investments

We’re looking at a business that returned GAAP $.52/share in 2021, $.52/share in 2022, and $.60 in 2023. To state the obvious: this business is nowhere near failing.

Furthermore, aside from substantial investments into distribution, NAPA 0.00%↑ recently completed a $400mm acquisition primarily using stock valued at $11.11.

A mildly crowded short

According to Seekingalpha, the current short interest is 5.8%.

That’s a wrap

I believe we have all the ingredients of a winning trade here. To spell it out: the market is dispirited after a massive, extremely well-timed acquisition using stock at twice the current price because of a working capital build and negative industry trends. Meanwhile, we have retained a strong balance sheet and trade at less than 10x trailing GAAP earnings before the acquisition is integrated and synergies are realized. Hedge funds who are brave enough to short this setup are the heroes that make this a great setup instead of just a good one.