Treasury Wine worth chucking out

The big listed wine producer really has gone off.

a woman

Just as Treasury Wine Estates (ASX: TWE) thought it best to cut its losses with millions of litres of wine in its United States market, investors should think about doing the same with the stock. You’d be hard pressed to mount a good case to buy it, and if you’re holding it you’d have to seriously consider either reducing your exposure or selling.

The near-term picture ain’t too pretty and it’s hard to see when there could be signs of a turnaround. If you’d managed to offload Treasury Wines when it was higher than, or trading around, $6 from mid-May to earlier this month you’d have to be pretty content with the decision.

Yesterday’s 19-cent rebound of more than 4% looks more like a dead cat bounce than anything and any more upwards movement will be more likely an opportunity to dump it than buy it.

The worst recent news was chief executive David Dearie’s July 15 announcement that the company would write down the value of its wine stocks and other assets by $160 million, cut the price of some brands and destroy $35 million of its cheaper US stocks. North America was thought to account for 38% of 2011-12 earnings and it was an improving market there and a falling Australian dollar that were fuelling hopes.

It might be a long haul, but with prudent management the world’s largest pure wine play one day could be worth buying again. The only thing you can say about when that will be is that it won’t be soon.

Such is the fall from grace that Morningstar, which not surprisingly has a reduce recommendation on the stock, sets its intrinsic value at $3.70, meaning it sees it as almost 30% overvalued even at the current price so far from recent highs. The agency had recommended a sell at $5.82 in early March. Even though it got to $6.47 just a couple of months ago, you’d have to say that was a good call.

Bell Potter recently put a sell on Treasury Wine and reduced its underlying 2013-14 earnings per share estimate by 30%. Worse still, it reduced its 12-month price target from $4.18 to $2.81. That makes getting out at the recent $4.92 worth considering.

Investors could be reasonably confident they won’t see any more one-day falls like the 8%-plus on July 15, but unless there is some particularly good news the stock price may keep gradually spilling towards Bell-Potter’s pessimistic projection.

The shareholders who hang on may find themselves clutching for straws when the company announces its full-year results on August 22.

Foolish takeaway

There might be a time when this stock looks a vintage worth buying again, but at the moment don’t expect it to age well in your portfolio.

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Motley Fool contributor Andrew Ballard does not own shares in Treasury Wine Estates.

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