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Is Treasury Wine Estates Ltd a bargain after 20% drop?

Investors have tipped out of shares in wine maker Treasury Wine Estates Ltd (ASX: TWE), after the company announced a $40 million drop in its earnings forecast for this year.

At the close of trading, shares in the maker of Penfolds Grange had fallen 20% to $3.64.

Treasury had previously told investors it expected full year earnings (EBITS) to be between $230 and$250 million. Now that figure has been revised down to between $190 million and $210 million.

In what appears to be a do-or-die strategy, Treasury said it decided to increase prices on some of its Commercial portfolio and run less deep promotional initiatives over the Christmas period.

So, the wine maker raised prices and offered less discounts over the vital Christmas shopping season, and expected that to result in higher earnings?

I may only be a lowly writer, but even I can see that trying to take that tack, under intense competition from local producers, and amid a deluge of imported wines and a wine oversupply, is virtual suicide. Treasury also says that austerity measures in China had also resulted in lower consumer demand for wine.

This is not the first time Treasury has shocked the market. Back in September last year, shares plummeted after the company announced CEO David Dearie was leaving immediately, and the company announced $160 million of writedowns on its US inventories in July, followed shortly thereafter by a 12% profit downgrade.

And it could get worse for the winemaker, as it forecasts these ‘challenges’ to continue into the second half of the year.

What is telling is that in 2013, the $3 billion market cap Treasury produced a net profit of $42.3 million, including material items. Australian Vintage (ASX: AVG), with a market cap of just $67 million, managed to produce a net profit after tax of $7 million, which suggests either Treasury is heavily overpriced, Australian Vintage is cheap, or perhaps both apply.

Foolish takeaway

Enjoy their products, but investors might want to look for better alternatives for their cash than Treasury Wine at this stage. Coca-Cola Amatil (ASX: CCL), which has recently re-entered the Australian beer market, or Gage Roads Brewing (ASX: GRB) could be better prospects.

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Motley Fool writer/analyst Mike King owns shares in Coca-Cola Amatil and Gage Roads Brewing. You can follow Mike on Twitter @TMFKinga

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