I've tweeted before about the only tequila pure play in the world - Becle which trades $CUERVO on the BMV. At a recent M$44 the valuation is wildly un-demanding for business of this caliber. Add in a free call which I'll explain below and this one really looks mispriced.
Becle derives most of profits in the US via Proximo Spirits in Jersey City. It is family controlled (~15% floats) and loaded with some great brands such as Jose Cuervo, 1800, Maestro Dobel and Bushmills. Reserva De La Familia Extra Anejo is my personal favorite.
Most of the public sprit peers are up significantly in 2021 with Diageo rallying over 23% so far yet Becle has somehow managed to find itself down 10% YTD creating a compelling set-up for the 3rd time since I've followed.
Tequila remains a hot category in US spirits right now. Its assault on vodka & whiskey in the US continues with the spirit accounting for 16% of industry dollar volume this past July which is up significantly over the past few years.
A glass shortage and supply chain inflation have created a share price hangover in the short term but there are meaningful offsets. Tequila is short deliveries to distributors but pricing is not an issue for most producers and they are taking price.
Producers are also favoring higher margin product so what's not being delivered tends to be lower margin/ASP product. The long and short of it is that profits per case are likely going up which helps offset the missed deliveries.
Short-term issues aside, Becle is organically growing faster than peers (no one has nearly as much tequila exposure), is less levered yet trades at a substantial discount to other producers.
The discount has become particularly sharp of late which makes for a very compelling risk vs reward opportunity.
All that is compelling enough but the real kicker for the shares will be the inevitable unwind of the agave super cycle. Agave is the main input for tequila and spot prices are up about 5x over the last 5 or 6 years. M$5/7 per kilo went to M$28/30 kilo.
Blue weber agave can take 5 to 7 years to mature, creating long periods of over and under supply. High prices motivated lot of new plantings, including from Becle itself, and industry data points to massive supply of mature plants hitting the market over the next few years.
Becle has revealed little about its internal sourcing plans since the IPO but did indicate its goal was to become largely self sufficient over time. It's likely they will be in a position to significantly curtail spot purchases of agave starting in 2022 or 2023.
It is possible the spot market begins to loosen up in anticipation of the huge wave of mature agave coming as well as players like Becle and Brown-Forman harvesting more and more of their own supply to produce tequila.
Either way, outside of an act of god, Becle is looking at a potential dramatic decline in the cost of its main input which may represent just shy of 1/3 of COGS.
This and continued growth is very likely to drive Becle's margins beyond the prior 2016/2017 peak and push earnings well past current sell side expectations for 2022 and/or 2023.
The set-up here is very skewed to the upside over the next 12 to 24 months with the free call on agave. It's not that common for an un-levered consumer staple/spirits player to potentially offer levered equity returns to owners.
Even if the agave super cycle doesn't unwind and input costs remain elevated, Becle's earnings are still going to drive higher as the growth in tequila continues and the company adds more scale.
With a long-term view, the downside looks pretty limited from here with great upside potential and there's always the chance the control shareholder decides to merge with a major at one point.
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