Raise a Toast to These Wine Stocks - Analyst Blog

With expectations of modest GDP growth in the vicinity of 3% and recovery in the U.S. job market after a dreadful winter, the focus has shifted to other indicators of the economic well-being amid continued QE3 tapering. While a number of industries are still struggling to gain stability, the wine industry looks bright. It has further caught investors' fancy with a bullish outlook for a strong harvest and balanced inventory position.

Data from International Organization of Vine and Wine (OIV) suggests that the U.S. is one of the largest growing wine markets in the world by volume, consuming about 769 million gallons of wine a year compared with the France's 742 million gallons. It is no wonder then that leading beverage companies like Brown-Forman Corporation (BF.B), Castle Brands Inc. ROX and Truett-Hurst, Inc. THST have outperformed the overall equity market so far this year, despite the fact that the Dow and the S&P 500 indices are trading near all-time highs.     

Industry Prognosis

According to an industry report by Silicon Valley Bank, the commercial banking division of diversified financial services company SVB Financial Group SIVB, fine wine sales in the U.S. will improve 6-10% year over year in 2014 after three consecutive years of decline in growth rate. By product category, luxury wines are anticipated to witness the largest demand as the Euro is expected to lag the U.S. recovery, thereby resulting in higher bottled imports and additional pricing competition from offshore.

The wine industry is also viewed to be passing through a transitional phase with a marked change in the U.S. demography. The consumption pattern is likely to evolve with a continued growth in overall demand as Boomers reach retirement and Millennials replace them as dominant purchasers of wine. The Millennials are also found to consume more foreign wines than other cohorts. Bulk imports are likely to continue to dominate the lowest price-point wine categories.

With a more predictable monetary and fiscal policy, stable interest rates and a pick-up in job creation, consumer discretionary spending for items like wine is likely to grow. A balanced inventory in all segments further makes the cellars well-positioned to capitalize on the growth potential. Despite the euphoria, high levels of student debt and intermittent job market improvements remain possible headwinds for the sustained growth in the industry.

2 Top Wine Picks

Amid such strong industry fundamentals, there are a couple of wine stocks with attractive valuation metrics backed by a favorable Zacks Rank. Let's take a closer look at these companies that appear to be well positioned to benefit from the solid sector dynamics.

Constellation Brands Inc. STZ

Constellation Brands is the leading wine company in the world with a strong portfolio of premium wine brands complemented by spirits, imported beer and other select beverage alcohol products. Since its inception in 1945, this Victor, NY-based firm has evolved as a significant player in the beverage alcohol industry with over 100 brands in its portfolio. Constellation Brands primarily focuses on premium wine brands, which includes Robert Mondavi, Clos du Bois, Arbor Mist and Blackstone.

In 2013, Constellation Brands was one of the best performing stocks in the S&P 500. Earnings estimate revision for the current quarter and fiscal for this Zacks Rank #2 (Buy) stock has moved up in the last 60 days, implying bullish sentiments for the long-term growth of the company. With a forward PE of 19.9x, long-term earnings growth expectations of 17.3% and a one-year return of 60.3%, Constellation Brands is surely a solid pick.

Truett-Hurst, Inc. (THST)

Based in Healdsburg, CA, Truett-Hurst produces a range of varietals of wine products, including Pinot Noir, Chardonnay, Sauvignon Blanc, Merlot, Cabernet Sauvignon and Zinfandel wines primarily in the U.S. and Canada.

With long-term earnings growth expectation of 40.0% and a year-to-date return of 20.5%, this Zacks Rank #3 (Hold) stock has managed to outperform the broader equity market. Furthermore, earnings estimate revisions for the current quarter have been moving up, implying bullish sentiments for the long-term growth of the company.

Moving Forward

According to conservative estimates, worldwide luxury goods spending are expected to grow by about 2% year over year in 2014, tapered by the sedate recovery in Europe and China. However, global growth in luxury cars, wine and spirits, and hotels are billed to outpace personal luxury goods spending with 6% growth in these categories in 2014. Consequently, this is the most opportune time to bet on these wine stocks.