Treasury Wine Estates Ltd share price is soaring: Here’s why

The Treasury Wine Estates Ltd (ASX: TWE) share price has jumped 8.5% to $10.98 in lunchtime trading, most likely due to an update made at the company’s AGM today.

According to CEO Michael Clarke, the owner of the Penfolds, Blossom Hill, and Wolf Blass wine brands expects to deliver at least $100 million in Cost of Goods Sold (COGS) – up from a previously announced $80 million by the 2020 fiscal year (FY20).

The company also expects to recognise run-rate, cash synergies from the Diageo Wine acquisition of US$35 million – up from a previously announced $25 million – also by FY20. Treasury acquired Diageo’s UK and US wine portfolios at the cost of $754 million in October 2015.

Both the above announcements aren’t necessarily new. They were both announced in August when Treasury reported its full year results.

Another re-confirmed goal is to increase EBITS margin to the high teens by 2018. Mr Clarke says the company is “on a journey to deliver a group margin that is towards our Asia region EBITS margin of 30% plus.

Where we land — between our current margin of 15% and 30% — will be through continued margin accretion and how much commercial wine TWE maintains in its portfolio,” he added.

Treasury Wine’s growth looks attractive if the company can achieve everything it has set out to do, but unfortunately, the share price is already pricing in a lot of success, with a P/E ratio of nearly 31x FY16 earnings.

Analyst consensus estimates are pointing to earnings per share of 38.6 cents in FY17 and 46.3 cents in FY18 according to Reuters. That’s growth of 24% this financial year and 20% in FY18. But if Treasury can achieve those earnings, at the current share price that’s a P/E ratio of 28x for FY17 and 24x FY18 earnings.

And if the company can maintain strong growth for a number of years beyond that, then the current share price could be cheap.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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