Stock Exchange lets readers listen in as...

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Beringer Wine Estate Holdings (BERW)

Jim: I must say, Mike, I never thought we’d pick a stock where we had to worry about the price of grapes. But here we are with Beringer Wine.

Mike: You know, as I remember, I once took a tour of the Napa wine country many years ago. Or more to the point, I don’t remember.

Jim: Must have had a good time. Anyway, Beringer claims to be the oldest continuously operating winery in the Napa Valley.

Mike: It’s also something of a wine conglomerate, with different brands and vineyards. Besides its namesake brands, it also has Meridian, Chateau St. Jean and Chateau Souverain.

Jim: Along with Stags’ Leap.

Mike: Beringer also imports some wines from overseas. So it tries to cover all segments of the market. And much like Maytag, which we discussed last week, this is a company that’s struggled in the low-priced end of its market and is moving more into the lucrative higher end.

Jim: Let’s be more specific here. I mean, there’s high-end, and then there’s wine that’s only sold by Sotheby’s.

Mike: OK, did you know that the “popular premium” part of the wine market is considered to be those selling for $3 to $7 a bottle? I mean, I always had the impression that $7 wine was bought by guys in ripped T-shirts. But it’s not.

Jim: No. That low-end business accounts for about 40% of Beringer’s business, and much of that consists of sales of Beringer’s popular White Zinfandel. Then there’s the super-premium market for wines costing $7 to $14 a bottle, and that’s where Beringer is putting more of its focus.

Mike: No surprise there, because those wines typically carry higher profit margins.

Jim: Then presumably, there’s the ultra-premium, exorbitantly priced segment of the market, you know, those wines you buy when you take the wife to dinner, right Mike?

Mike: No, I order the $7 bottle; the restaurant just charges me $25.

Jim: Now, at the risk of digressing somewhat, I want to talk about the business Beringer is in, because the wine industry drives me to absolute distraction. And that’s when I’m sober.

Mike: I’m glad you answered the question before I could ask it.

Jim: I like wine, but I have never seen a business that makes it more complicated for consumers to know what they’re buying, which I believe is costing the industry plenty of lost sales. It’s also one reason I would not buy Beringer’s stock.

Mike: Uh-oh. Are you finished?

Jim: I’m just getting warmed up. Look, even the wine industry concedes that it’s struggling to enlist the younger generation because wine is so damn complicated. Do I want Chardonnay or Cabernet Sauvignon? Red or white? Chilled or room temperature? Will it go with fish, or just with meat? Is this wine OK for a casual dinner, or should it be saved for special occasions? It’s ridiculous! I mean, you need a night course just to learn the basics. No wonder so many people mostly drink beer just to be done with it.

Mike: Spare me, Jim. Older people, as you said, are the core wine buyers, and that’s the bulk of the population. Meanwhile, the aging baby boomers are moving into that sweet spot for winemakers. In fact, Beringer has predicated a lot of its strategy on selling more expensive wines to that group.

Jim: Fine, it’s a good strategy to go after that group, which can afford the wines costing $10 to $14 a bottle or whatever. But why alienate the next generation?

Mike: But it’s a moving target. We’re all getting older and moving from Budweiser to Beringer, the way you might move from a Bug to a Buick.

Jim: No, we’re not, and that’s my gripe. Simply put, the wine industry is doing a terrible job of attracting younger customers--and please, no letters about encouraging teen drinking. I’m talking about people ages 21 to 35.

Mike: But what would you have the winemakers do? Sure, they could simplify everything by putting all wines in boxes with specific instructions, you know, like shampoo. But let’s be honest: Wine is a complicated, sometimes snooty product. It’s got a wide range of, I’m sorry, varietals.

Jim: Watch it.

Mike: More to the point, Beringer has had good success marketing wines such as Meridian, which came out of nowhere. And its White Zinfandel is one of the best-selling wines in the country. But I’m not sure there’s a master solution to your problem. All I know is that when I was young I went for the kind of wine you drink with a straw. But I’m more discriminating now.

Jim: As for Beringer, its performance has held up pretty well lately. In the six months ended Dec. 31, its profit rose a nice 19% on an 18% sales gain. Very good. And the stock has nearly kept pace with the broader market since it went public in ’96.

Mike: Yeah, years ago Beringer was owned by Nestle, but I gather that chocolate wine never caught on. Then it was bought by an investor group called Texas Pacific, which sold a minority stake to the public in ’96.

Jim: But in the last 12 months, the stock has basically gone nowhere. It sells in the high $30s, or about 17 times its expected per-share earnings for its fiscal year ending in June. And I don’t see this stock outperforming the market going forward.

Mike: I like this stock. Beringer has popular brands, strong management, a diverse product line and a good strategy to capture more of the lucrative wine segment.

Jim: But it’s not returning anything to its investors ... except a buzz.

Mike: No, all signals are for this stock to do very well over the next year to 18 months.

Jim: Really? Give me just two examples.

Mike: Beringer’s top line is growing, and its bottom line is growing. There’s two for you.

Biogen (BGEN)

Mike: Biogen is the nation’s second-largest biotechnology company.

Jim: Behind industry kingpin Amgen.

Mike: And like all biotech stocks lately, this company’s shares have been on a tear. Biogen alone is up 20% already this year, to just over $100 a share. And as we’ve said before about drug makers, its products sound like the names out of the Middle Ages. By the way, did you also notice that its main drugs all start with the letter “A”? What’s that about?

Jim: Don’t know, but one of them is Avonex, and this drug--which helps treat people with multiple sclerosis--has been the home run that’s made Biogen the industry leader it is today.

Mike: Right. There are going to be 100,000 patients on this drug by year-end.

Jim: The drug came out in ’96 and last year generated $620 million in annual sales, up a whopping 60% from the prior year.

Mike: But let’s face it, the important thing about Biogen isn’t “A” drugs, but the “p” word.

Jim: The word is “pipeline.”

Mike: Yep, and the pipeline of this company--that is, how many drugs it’s got in development but not yet on the market--is dry.

Jim: That’s the big problem with this stock and the main reason I wouldn’t buy it. Yes, the stock is up sharply because all biotech stocks have rallied. But Biogen’s thin pipeline is serious, because in 2003, the rights that enable Biogen to sell Avonex all by itself go away.

Mike: Right, and then copycats are free to dive into the market. At least one other drug company already is set to roll out a rival to Avonex.

Jim: Biogen has two drugs working their way through human trials as it prepares to ask for Food and Drug Administration approval. One is Amevive, for treating psoriasis, and the other is Adentri, for congestive heart failure.

Mike: And it has a third, Antova, for regulating the immune system. But that got yanked from trials in November after patients developed clotting problems, and it’s still unclear when testing will resume.

Jim: Moreover, getting any drug approved is notoriously hard to predict--period. There’s no guarantee that the FDA will come through, and so Biogen is an especially speculative bet.

Mike: There are other red lights flashing here. There’s talk that Biogen could get a windfall from an arbitration suit it’s fighting with Schering-Plough. But that’s a crapshoot. When I see analysts placing their bets on an arbitration case, I say look out below.

Jim: Which is why, once again, a strong pipeline is so important.

Mike: Exactly. Not only do you need lots of drugs in development, but you also need those drugs to keep arriving over a long period of time. That’s because it can be two years or more from the time a drug is developed until the time it reaches the market, at which point your patent protection is already running out.

Jim: To Biogen’s credit, it has very little long-term debt--so it’s got financial staying power. And Avonex continues to grow like a weed. But Biogen’s stock is selling for a pricey 56 times this year’s earnings. That’s not unusual in the biotech sector, but it’s still a rich multiple for a company that’s selling one main product.

Mike: And now what happens? How long will Wall Street’s desire for biotech shares continue? A quarter? Two quarters? But when it ends, the tide is going to recede in a hurry--and there’s going to be lots of wreckage visible on the ocean floor.

Write or e-mail with a stock you would like to see discussed in this column. Peltz is at james.peltz@latimes.com, and Hiltzik is at michael.hiltzik

@latimes.com. Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

Beringer Wine

Monday: $38.00

Biogen

Monday: $101.25