A Guaranteed ‘Return’ From Treasury Wine Estates

Guaranteed returns are a rarity in the share market, but this Australia Day, Treasury Wine Estates (ASX: TWE) is offering one. Find out now how you can lock in your guaranteed return.

The ‘Bad Taste Amnesty’ campaign and a closer look at TWE

On January 26, from 10 am to 2 pm, you’ll have the chance to trade in a bad bottle of wine for a ‘deliciously vibrant’ one (superlatives courtesy of the event’s sponsor). Simply take a bottle of wine you don’t want down to your local First Choice Liquor store and the staff will accept your bottle in swap for a bottle of Fifth Leg white or red. It’s all part of the company’s fifth annual ‘Bad Taste Amnesty’ campaign.

Fifth Leg is just one of Treasury Wine Estates’ brands, which also include Beringer Vineyards, Lindeman’s, Penfolds, Rosemount Estate and Wolf Blass, among others. This impressive portfolio –54 brands in total, representing 32 million cases of wine sold annually– is unmatched in the share market.

In fact, Treasury Wine Estates is one of the ASX’s few pure plays on wine. However, as well known as Treasury’s brands are, and as tasty as the individual products themselves may be, you’ll want to make a sober judgment when it comes to picking up TWE shares just now.

Shares priced like a fine wine

When Treasury Wine Estates shares spun out of Fosters Group in May, 2011, shares traded around the $3.50 mark. Since then, shares have flirted with the $5 mark, closing at $4.77 on January 16, representing a P/E ratio of about 35 and an enterprise value to sales ratio of about 1.8.

This premium valuation suggests the market is expecting big growth from the company, more perhaps than it will be able to deliver. This past October, the company stated that it expects EBITS for the first half of 2013 to be below 2012 levels by approximately 20% and reiterated that a rebound to growth can be expected in 2014, as wine supplies and demand come back into balance after the supply glut of recent years. However, such a rebound is not guaranteed. Only a pullback in the share price would allow for a margin of safety.

Possible takeover target

Speculation as to a foreign takeover may be behind the share price run-up as well. As The Australian recently reported, “With the wine sector now on the edge of a major recovery, speculation is mounting that a serious bidder for TWE will soon emerge, with shares in the company rising as much as 67 per cent in the 19 months since the demerger.” But neither is a takeover guaranteed.

In other words, you may be better off sticking with the free Fifth Leg wine for now.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned here. 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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