The outlook seemed a lot rosier for shareholders in Treasury Wine Estates Limited (ASX:TWE) back in September. The company had just reported FY18 NPAT of $360 million, an increase of 34% on the prior year. And it had declared a full year dividend of 32 cents per share, up 23% on FY17. And to cap it all off, Treasury Wine Estate’s share price was on the cusp of posting a new 52-week high, looking to better the $20.20 it had reached in May.
But since then it’s been mostly down hill. When global markets became more volatile over the backend of 2018, Treasury Wine Estates suffered the same fate as many other high P/E growth stocks. Between September and November, its share price plunged over 30%, plummeting to a new 52-week low of just $13.38.
Investors feared that a potential economic slowdown in China could severely hinder Treasury Wine’s strategic growth prospects. In FY18, $205 million out of the Group’s $530 million worth of EBITS (earnings before interest, tax and self-generating and regenerating assets, a term used in agricultural accounting to revalue biological assets, like grape plants) came from its Asian segment.
Local investors had also been nervously watching the performance of Constellation Brands, a US-based producer of wine, beer and spirits, which was forced to downgrade its 2019 forecasted earnings on Wednesday, in part blaming weak wine sales.
However, incoming Constellation Brands CEO Bill Newlands told analysts that it was brands at the lower end of the wine business that were dragging down earnings. Treasury Wine Estates tends to target the mid to higher-end of the wine market, with more premium brands like Penfolds, Pepperjack and Wolf Blass.
Plus, Constellation was also hurt by its efforts to diversify into the fledgling US cannabis market through a US$4 billion investment in underperforming Canadian company Canopy Growth. Constellation had to take a US$164 million hit to its P&L after it wrote down the investment in the most recent fiscal quarter.
Management at Treasury Wines clearly felt that the climate of uncertainty was such that they needed to reassure investors ahead of its planned 1H19 results announcement. Possibly in tacit acknowledgement of investor concerns around the Chinese market, the market release stated that Treasury Wines was “very happy with the trading performance across all operating regions” (emphasis added).
The company also revealed that its first half performance beat EBITS consensus forecasts of $332 million, and would instead fall within the range of $335 million to $340 million. Plus, it reiterated its full year EBITS growth guidance of 25%.
This sends a particularly strong message to the market that it shouldn’t be distracted by the performance of overseas companies like Constellation Brands. While the two companies operate in a similar market, their product mix and target consumer make them very different businesses.
Personally, I think shares in Treasury Wines have been heavily oversold and offer great value at current prices. However, the proof will be in the pudding – if results show particularly strong EBITS growth in the Asian segment, expect the Treasury Wines share price to continue to surge.
Motley Fool contributor Rhys Brock owns shares of Treasury Wine Estates Limited. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. 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 Scott Phillips.