Will 2016 be Treasury Wine Estates Ltd’s best year yet?

Credit: rob_rob2001

It seems like only yesterday that Australia’s only pure-play listed wine exporter was thrown into the bargain bin at a steep 50% discount to its then-all-time high of $6.43.

Fast forward 24 months and the company’s share price on Friday touched another all-time high of $9.35, over three times the value it plunged to in those dark days of early 2014.

What did we miss?

It was only in mid-2015 when many professional analysts still didn’t see any opportunities in the share price of Treasury Wine Estates Ltd (ASX: TWE) as the company made, what appears to be, an exceptionally solid purchase in Diageo’s wine operations.

The acquisition came only 12 months after the company announced two write-downs in 6 months due to a supply glut in the US that resulted in millions of dollars of wine being destroyed and a revaluing of assets purchased many years earlier.

The write-downs came with some strategic changes to the business, including splitting its luxury and premium wine brands from its commercial wine brand portfolio in Australia and changing the release date of various Penfolds wines to October to be more aligned with the festive season.

What does the next 12 months hold?

Analysts now predict that Treasury could be one of the very few consumer discretionary stocks that is capable of delivering double-digit earnings growth over the next few years.

For the 2016 financial year, the experts are predicting earnings per share (EPS) of 28.5 cents and dividends per share of 18.5 cents, implying a dividend yield of 2.3%.

For the 2017 financial year, the experts are predicting earnings per share (EPS) of 35 cents and dividends per share of 23.5 cents, implying a dividend yield of 3.3%.

Should you buy Treasury Wine Estates?

The company’s shares are trading on a fairly hefty price to earnings ratio of around 28, however with earnings growth expected to come in at around 20% next financial year it doesn’t appear to be massively overvalued.

Wine drinkers are notoriously fickle however, so shareholders need to be aware that the share price will be as dependent on the quality of wine that comes from companies like Penfolds, Wolf Blass, Lindeman’s and Beringer as it will be on financial management. The company can also be impacted by drought, fires and floods, which could savage profits for many years in the worst case scenario. It’s for this reason that some investors are now focussing entirely on internet-related companies for their massive growth prospects and lower relative risk to natural disasters.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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