Why Duckhorn (NAPA) Stock Is Nosediving

Petr Huřťák /
2023/12/07 12:36 pm EST

What Happened:

Shares of wine company The Duckhorn Portfolio (NYSE:NAPA) fell 6.9% in the morning session after the company reported third quarter results with revenue, operating margin, and EPS missing analysts' estimates, driven by worse-than-expected sales volume declines (3.4% decline vs 2.8% projected decline by Wall Street). The Duckhorn observed signs of softening in consumer sentiment and luxury wine trends. Also, a portion of shipments expected for November occurred earlier-than-anticipated, pulling forwarding some revenue to the current quarter. As a result, it expects the full year sales to come in at the lower-end of the previously announced guidance range. However, the full year adjusted EPS guidance was maintained. Overall, this was a weaker quarter for Duckhorn's highlighting macro challenges. 

Following the results, Bank of America Analyst Peter Galbo downgraded the stock's rating from Buy to Neutral and lowered the price target from $15 to $11, citing "a less certain growth outlook."

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Duckhorn? Access our full analysis report here, it's free.

What is the market telling us:

Duckhorn's shares are not very volatile than the market average and over the last year have had only 6 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 21 days ago, when the company dropped 15.3% on the announcement of its acquisition of Sonoma-Cutrer Vineyards for around $400 million, paid in a mix of company stock and cash. Sonoma-Cutrer, a major Chardonnay winery, owns extensive vineyards and distributes its luxury wines through wholesalers and directly to consumers across the U.S. As part of the deal, Brown-Forman will receive 31.5 million shares of Duckhorn's common stock, valued at about $350 million, representing a 21.5% ownership post-closing. Additionally, Brown-Forman will receive approximately $50 million in cash, subject to certain adjustments. Sonoma-Cutrer, acquired by Brown-Forman in 1999, had approximately $84 million in sales for the twelve months ended July 31, 2023. The deal is expected to generate around $5 million in annual synergies, which will be fully realized from fiscal year 2025. The new share issuance represents roughly 30% of Duckhorn's existing outstanding shares and could have a negative impact on Duckhorn's stock price in the short term, as it could lead to dilution for existing shareholders. However, the long-term benefits of the acquisition, such as increased market share and revenue growth, could outweigh the short-term dilution effect.

Duckhorn is down 43.1% since the beginning of the year, and at $9.27 per share it is trading 45% below its 52-week high of $16.86 from January 2023. Investors who bought $1,000 worth of Duckhorn's shares at the IPO in March 2021 would now be looking at an investment worth $539.29.

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