Two-and-a-half years ago, after some managerial blunders and generally poor operating performance, one nameless Foolish contributor (ahem!) wrote that Treasury Wine Estates Ltd (ASX: TWE) wasn’t a good investment prospect.

That same contributor later suggested investors had it wrong when they rejected a $5.50 takeover offer that was apparently a substantial premium to what the business was ‘worth’.

Shares are now up more than 250% since January 2014, and 80% since the takeover offer fell through – and there could be more in the works after Treasury released its full year report to the market today:

  • Revenues rose 19% to $2,343 million
  • Statutory Net Profit After Tax (“NPAT”) rose 131% to $179 million
  • Underlying* Net Profit After Tax up 56% to $222 million
  • Earnings per share of 25 cents per share, total dividends of 20 cents per share
  • Synergies from Diageo upgraded to US$35 million (up from US$25 million) per annum by 2020
  • Cost Of Goods Sold (COGS) refinement program upgraded to $100 million per annum (up from $80 million) by 2020
  • Margins set to hit ‘high-teens’ by 2018, two years ahead of expectation
  • No forecasts provided but outlook for ‘continued momentum’ and ongoing growth in earnings and margins as well as an ‘exciting’ second half after the Diageo portfolio reset is finished

*Treasury calls this ‘NPAT before material items’ and it excludes acquisition costs, writedowns and restructuring expenses

So What?

An impressive result, but it’s important to note Treasury benefited from $40 million in foreign currency tailwinds during the year. That aside, the business’ improved operating performance was highly respectable with volume growth across all of its markets. European and Asian volumes jumped 26% and 40% respectively, while Australia and the US volumes rose 3% and 6%.  Here’s a chart showing Treasury’s earnings by geography:

(EBITS = Earnings Before Interest, Tax, and changes in the value of Self-regenerating assets)

TWE chart margins

 

 

 

 

 

 

 

 

 

 

Although Asia is a relatively small part of sales, it’s important to note that this segment is growing rapidly and the Asian segment also has EBITS margins (a measure of profitability) that are twice the size of those in Europe, Australia, or the US.

This makes Asia the logical place to reinvest funds and Treasury continues to expand its distribution here both physically and online.

As a result of the company’s restructuring in the last two years, Treasury’s Return on Capital Employed improved significantly from 7.8% to 9.6%, a much-needed change that will likely improve further over the next couple of years.

The Diageo acquisition also appears to be better than first thought as the company exits unprofitable volumes and bad customer contracts.

Now What?

With the developments mentioned above, Treasury is putting itself on a strong footing to deliver improved performance over the next couple of years. As the company’s balance sheet improves further and margins widen I believe there’s room for a significant increase in dividends as well. A big consideration will be price, with Treasury Wines trading on a lofty price to earnings multiple – although this could prove illusory if margins and sales continue to widen.

I’ve been wrong about Treasury before, so I’m not forming an opinion on whether the company is a buy today.

If you want to learn about companies that I do think are a buy today, then read on...

Discover The Motley Fool's Top 3 blue chips for 2016.

These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required!

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.