Treasury Wine adds SWAG for investors


If you’re not the type of investor who gets excited about re-insurance rates, banking industry write downs, or the ‘infrastructure’ sector, perhaps a portfolio with a bit more SWAG will be more down your alley.

‘SWAG’ sounds like the brainchild of an American rapper, but is actually an acronym for Silver, Wine, Art and Gold; a set of alternative ‘asset classes’ argued by author Joe Roseman to potentially prevent the ravages of inflation and current low returns on bonds around the world.

Silver and gold can be added into a portfolio relatively easily, if not through their physical form (like coins or gold bars) then by way of listed exploration and mining companies like Silver Lake Resources (ASX: SLR), BHP Billiton (ASX: BHP) or Rio Tinto (ASX: RIO). Art is slightly more problematic.  As well as being of questionable ‘investment’ status, very few of us could afford to stump up the cash for an original Rembrandt or Picasso, nor is there an abundance of listed companies where we can get a slice of the art action (except perhaps Deutsche Bank), which boasts one of the largest corporate art collections in the world, with 57,000 pieces according to Forbes).

Then there’s wine.  Like silver or gold, investors can buy and hold the physical ‘asset’ and hope they can find someone willing to take it off their hands down the track, but for investors who may not be able to resist the temptation to crack into their retirement fund after a hard day, there’s Treasury Wine Estates (ASX: TWE), makers of iconic Penfolds, Beringer and Wolf Blass wines.

Good Vintage

In its first full year out on its own after being demerged from parent company Fosters Group in 2011, Treasury announced a full year profit of $135.5m last week.   Despite expecting a lower 2013 result, investors we spurred by the expectation of a strong 2014 financial year after an exceptional vintage and “almost ideal growing conditions” this year.  The news went down like a smooth glass of Grange with investors, pushing the company’s share price up 4.5%.

However it importantly highlights the long term risk faced by agricultural companies (including the likes of Graincorp Limited (ASX: GNC) which rely on good weather and growing conditions to produce consistently superior products. From West to East

The key to Treasury’s future lies in the company’s plans to wind down its exposure to the low-margin end of the wine market in the UK and Ireland and increase its focus on the company’s premium brands.   The real growth lies East, where the strategy is to gain exposure to the growing number of connoisseurs in Hong Kong, China and wider South East Asia. The push is already bearing fruit, with earnings up 40% in this part of the world.

Crisis?  What crisis?

The second prong to increasing revenues is Treasury’s strong pricing power.  In June, Treasury announced the limited edition release of its 2004 Kalimna Block 42 cabernet sauvignon, priced at a cool $168,000 per bottle.  On Friday it revealed that all but one had been sold.

That, on top of its not so limited variety of Bin 620 shiraz and cab sauvignon blend which costs $1000.00 a bottle, as well as the premium price afforded to its other brands, helps drives high margins and cashes in on the ‘ultra premium’ wine market.

Foolish Takeaway

Treasury announced a final dividend of 7 cents per share, bringing a total of 13 cents for the year.  With a price earnings ratio of around 22 times, the company does not appear cheap, but good strategic decisions leveraging their strong branding and pricing power to their advantage should see growth in revenue over the coming years.   Investors looking to put a bit of SWAG into their portfolio may want to keep an eye out for a lower price.

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Motley Fool contributor Regan Pearson doesn’t own shares in any company mentioned in this article. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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