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Is Treasury Wine Estates undervalued?

According to a report in the Australian Financial Review, broker CLSA has valued Treasury Wine Estates (ASX: TWE) at $6.50 per share. With the stock currently trading at $4.92 it would appear like a good time to revisit the fundamentals of the company.

Treasury Wine fell out of favour with the market back in July when the stock plummeted from around $5.90 to $4.90. Over the following months the stock continued to trade lower, ultimately reaching a 52-week low of $4.30 at the end of September.

The cause of the collapse in the share price was the unexpected announcement by the company that it would destroy a significant volume of old and outdated inventory within its US distribution network that would lead to a $160 million impairment charge. This understandably left investors nervous given the size and unexpected nature of the announcement and was followed two months later by the departure of the CEO. The bad news hasn’t stopped there either with litigation funder IMF (ASX: IMF) recently announcing it would push ahead with plans to fund a shareholder class action against Treasury Wine.

All of this bad news has knocked the share price down to a point where CLSA obviously sees value. For investors it is always important to distinguish between short-term bad news that a company can overcome and long-term issues that may continue to hamper a firm. In the case of Treasury Wine, all of these issues would appear to be temporary, which means the fall in share price could have created a buying opportunity.

CSLA makes note in its analysis that it has confidence that the hard assets of Treasury Wine are worth their stated book value of $1 billion – however, investors should note that Treasury Wine is selling for a significant premium to this asset backing. For investors prepared to adopt an asset-based valuation for wine producers, they may also wish to take a look at Australian Vintage (ASX: AVG), which trades below its book value. 

Foolish takeaway

While the interim CEO of Treasury Wine did note demand from the all-important export destination of China has softened due to the recent leadership change and government austerity measures, the long-term outlook for sales growth into China and also within the USA division in very appealing. These short-term hiccups at Treasury Wine Estates might just have created a long-term buying opportunity!

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Motley Fool contributor Tim McArthur owns shares in Australian Vintage Ltd.

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