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Treasury Wine Estates: One for the cellar?

Treasury Wine Estates Limited (ASX: TWE) was created in 2011 as a result of the spin-off of the wine assets of Foster’s Group Limited (itself now owned by global brewer SAB Miller).

I have a term for companies created by spin-offs – ‘orphans’.  The basic idea is that a neglected division of a large conglomerate often does very well as an independent business entity by being able to concentrate fully on its own business without conflicting demands from a parent company.

The most outstanding examples in Australia are Cochlear Limited (ASX: COH) and Ansell Limited (ASX: ANN), both previously spun-off from Pacific Dunlop, and CSL Limited (ASX: CSL) once a part of the CSIRO.

On 17th February 2012, TWE announced its half-yearly results.  The impact of Foster’s management is evident from a cursory examination of key numbers, and comparing them to its global competitor in Constellation Brands, Inc. (NYSE: STZ).  The comparison is summarised in the table below:

Treasury Constellation
Sales AUD$1.75b US$2.74b
Market Cap AUD$2.4b US$4.4b
Price/Sales Ratio 1.37x 1.56x
Price/Book Ratio 0.82x 1.63x
Return on Assets 2.1% 4.29%
Return on Equity 2.7% 23.21%

Management has indicated that it is on track to strip out $30m per annum of costs – a big number in the context of a $40m half yearly profit.

Investors are well aware of the current problems facing Australian wine growers. An oversupply of wine grapes and the high Australian dollar are severely affecting business.  Even so, there is no doubt that the current numbers for Treasury are abysmal.  The return on assets is 2.1%!  Return on equity is 2.7% in an industry where the norm is 12% to 15%.

Bear in mind that we are talking about the owner of brands such as Penfolds, Rosemount and Wolf Blass!

Foolish bottom-line

The key issue facing current and potential investors in Treasury Wine Estates is very simple. Is management able to whip this business back into shape to be at least on par with industry norms?

Given the lack of comparisons with a previous reporting period, I believe it is too early to know. The next half will tell the story on whether management is delivering. Remember, patience is a virtue.

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Motley Fool contributor Peter Phan does not own shares in Treasury Wine Estates.  The Motley Fool ’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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