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Is Australian Vintage Limited a better buy than Treasury Wine Estates Ltd?

Credit: RickBakas

One of the best performing shares on the the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in the last 12 months has been Treasury Wine Estates Ltd (ASX: TWE).

Shareholders of the owner of the Penfolds, Blossom Hill, and Wolf Blass wine brands have seen the value of their holdings rise by a massive 76% during this time thanks largely to the company’s phenomenal growth in international markets.

In FY 2016 Treasury Wine Estate’s grew its revenue by a solid 18.9% to $2,343.3 million. On the bottom line the global wine company posted an even more impressive 131% rise in full year statutory net profit after tax of $179 million. Because of this its shares are changing hands at 54x full year earnings. Although the market has forecast for a strong FY 2017 which is likely to bring its shares to a more reasonable 34x earnings according to CommSec. However, for many investors this will still be a little too expensive.

One alternative that investors could take a closer look at is Australian Vintage Limited (ASX: AVG). Australian Vintage is the company behind the McGuigan, Nepenthe, and Tempus Two wine brands.

Although the company produced a loss this year, if you exclude one-off items relating to the termination of the Del Rios vineyard lease then it paints a very different picture. According to my calculations excluding one-off items would have resulted in net profit after tax close to $8.8 million, up around 10% on last year.

As a result earnings per share would have come in at 3.8 cents. Which at the current share price would mean its shares are trading at a big discount (at just 14x earnings) to Treasury Wine Estates.

Whilst the termination of the Del Rios vineyard was costly, it was a great move by management in my opinion. Thanks to its termination and the expiry of some onerous third party grower contracts, management is expecting a significant reduction in its future grape costs and improvements in cash flow.

Overall I’m very optimistic on Australian Vintage’s future. In the last five years sales of its three key brands have almost doubled and I feel there is likely to be even more growth ahead for them. The company is slowly growing its business in China and is in the process of signing a distribution agreement with a major distributor in the United States.

In light of this I believe Australian Vintage could prove to be a great buy and hold investment today and possibly a better option than the expensive shares of Treasury Wines Estate.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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