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Should you buy Treasury Wine Estates for Christmas?

It hasn’t been the greatest year for investors in Treasury Wine Estates (ASX: TWE), with the share price suffering from an unexpected admission by the winemaker and marketer that it would destroy a significant pile of excess stock within its North American distributor network and take an associated writedown.

While the destruction of excess inventory will impact reported earnings for the financial year (FY) ending 30 June 2014, there are reasonable grounds for viewing this as a one-off legacy issue that the company will learn from and not repeat. Excluding the excess inventory issues, Treasury reported an increase in sales volumes, revenues and earnings for FY 2013.

Brand power

Treasury Wine Estates owns a suite of brands which many wine drinkers are keen to add to their cellars or equally to place on their Christmas dining tables. The desirable brands include Penfolds, Saltram and Wynns Connawarra from Australia and Beringer and Castello di Gabbiano from the USA and Europe respectively.

Valuation

Earnings per share (before material items and self-generating and regenerating assets) came to 21.1 cents for FY 2013 which implies a hefty price-to-earnings ratio of 21.9; however with broker consensus forecasts for EPS to rise to 27.5 cents in FY 2014, the multiple falls to 16.8. This hefty multiple may be enough to put some investors off. Another gripe is that the dividend of 13 cents per share equates to a skinny yield of just 2.8%, based on its current share price of $4.62.

The benefits of wine

Although fellow beverage producers Coca-Cola Amatil (ASX: CCL) and Gage Roads Brewing (ASX: GRB) might have appeal for investors looking for exposure to beer sales, recent findings by research firm IBISWorld shows that beer consumption in Australia has been declining over the past decade, while over the same period wine and champagne have been increasing in popularity amongst Australian drinkers.

Foolish takeaway

Coca-Cola and Gage Roads are of course aware of the declining consumption in beer volumes. In response they are positioning themselves in the craft and imported beer segments which are still growing. However in terms of export growth potential and an overall growing market, Treasury Wine looks well positioned to benefit.

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Motley Fool contributor Tim McArthur owns shares in Gage Road Brewing.

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