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Andrew Peller produces and markets a number of wine brands, including Peller Estates, Trius, Hillebrand, Sandhill and Wayne Gretzky Estates.debyaho/Getty Images/iStockphoto

Everyone loves Canadian wine. Should you?

I'm not talking about preferring a bottle of Niagara Peninsula sauvignon blanc over, say, a Bordeaux, but, rather, the rising enthusiasm for shares of Andrew Peller Ltd., the wine producer based in Grimsby, Ont.

Since the start of September, the share price has rallied 46 per cent, breaking successive record highs as investors embrace two particularly attractive aspects of the company's wines: They are exceptionally profitable and this profitability hadn't been fully reflected in the share price.

But with Andrew Peller's stock now reflecting a very bright future, how much upside is left?

Andrew Peller produces and markets a number of wine brands, including Peller Estates, Trius, Hillebrand, Sandhill and Wayne Gretzky Estates.

The company has been around since 1961, but several bullish trends have recently raised its profile among investors.

Wine has been grabbing a bigger share of the alcoholic drinks market in Canada, driven both by younger and older consumers, which makes it an ideal long-term investment.

The wine market is also consolidating, driving better production and distribution efficiencies, attracting sophisticated investors. In October, 2016, the Ontario Teachers' Pension Plan announced it had acquired Constellation Brands Inc.'s Canadian wine operations (home to Jackson-Triggs, Inniskillin and Wine Rack retail stores) for more than $1-billion.

The deal, involving one of the world's shrewdest long-term institutional investors, awarded Constellation Brands Canada with a high valuation – 12 times enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization).

This valuation naturally influenced other wine players. Andrew Peller's share price jumped more than 10 per cent immediately after the deal between OTPP and Constellation Brands was announced, reflecting the belief that its shares were undervalued.

But Andrew Peller has also been driving much of its success with its own moves. Through cost cutting, price increases and a tilt toward more profitable wines, the company has been improving its margins and profit.

Profit increased to more than $9.2-million in the fiscal second quarter, ended Sept. 30, 2017, up 21 per cent year over year. As a percentage of sales, gross margins rose to 42.1 per cent, up from 38.1 per cent year over year.

Andrew Peller has also been striking deals for other wineries. In September – around the time the stock embarked upon its current rally – the company announced a deal to acquire three British Columbia wineries for a combined $95-million, raising expectations for even better margins and profit.

And, lastly, analysts from Echelon Wealth Partners Inc., Laurentian Bank of Canada and Acumen Capital Finance Partners Ltd. now cover the company (all three with enthusiastic "buy" recommendations), giving the stock greater visibility among investors.

A lot has to go right, though, for Andrew Peller's share price to keep rising.

First, the low valuation on the stock has disappeared. According to Bloomberg, the EV/EBITDA ratio, which helped define the deal between OTPP and Constellation Brands in 2016, is now above 17, up from 13 before the latest rally kicked in. That's in line with Consolidated Brands' current valuation.

The stock's price-to-earnings ratio is a lofty 25, using trailing profits, which implies big expectations for profit growth ahead.

Second, investors are likely expecting Andrew Peller to strike more deals. This seems a reasonable bet, given the fragmented wine market in Canada. But can the company find compelling takeover targets if valuations for wineries are on the rise?

And third, the market for domestic wine in Canada is going to have to remain attractive. On Tuesday, the status quo was challenged when Australia, a wine heavyweight, launched a complaint with the World Trade Organization, alleging Canadian policies toward wine sales in grocery stores in some provinces favour domestic over imported wine. The United States launched a similar complaint against Canada late last year.

Can Canadian wine stand up to more competition from imports? Investors aren't so sure: Andrew Peller's share price slumped as much as 4 per cent on Tuesday, before recovering most of this lost ground by Wednesday afternoon.

If you missed out on the previous rally, buying on these dips might be your best bet. But be warned: The stock is not cheap.