The Treasury Wine Estates Ltd (ASX: TWE) share price reached a 5-month high of $16.82 last week after it suffered a beating late last year following a "slowdown on clearance of imports into China" that delayed the replenishment of Chinese inventory levels.
Many brokers are sceptical about Treasury Wines' ability to deliver meaningful results given their current valuation. A Goldman Sachs recommendation released on January 7, 2019 rates the company as neutral with a target price of $13.40. This represents a downside of 18% to the current share price of $16.32.
Goldman Sachs cites similar fears including China's slowing macro environment and weakness in the Americas region.
On the flip side, Treasury Wines did announce a performance upgrade on January 10, 2019. The company reported its consensus EBITS to be in the range of A$335 million to A$340 million compared to A$332 million. They also reiterated that full-year guidance will be approximately 25% reported EBITS growth for FY19.
So what can we make of this information?
Bull case
Treasury Wines currently trades at a P/E ratio of 32x FY18 earnings. Given its recent trading update, it is unlikely that the company will have an earnings surprise. Here are some areas that make a bull case.
The company has a new operating model initiative for the volatile Americas region. This new strategy could pay dividends and pave the way for more consistent sales growth.
Australian wine exports have climbed 10% to $2.82 billion in 2018. A large contributor to this growth has been Treasury Wines' Penfolds and Wolf Blass brands into China.
There has been a global shift on consumption from cheap or commercial wines to more premium wines, which works favourably for Treasury Wines.
Bear case
Treasury Wines does carry a relatively expensive valuation which comes with significant risks. While it is true that investors should not expect any surprises to the companies FY18 performance, the guidance will defy where the share price goes. Some areas of concern include:
- Will issues regarding logistics and import clearance persist in China?
- Does a slowing Chinese economy impact the company's bottom line?
- Brexit could spell trouble for Treasury Wines as new customs procedures between Britain and EU could clog logistics
- The Americas operations revamp is still in its early days and the initial impact of this revamp was negative growth for the region.
Foolish Takeaway
In my view, investing in Treasury Wine Estates at this point in time poses greater risks than a few weeks ago.
I believe investors should wait for the company to release their annual report on February 14 before making an investment decision.
The guidance will be key in determining if Treasury Wines is still a growth machine or value trap. After all, we have seen companies miss expectations and plummet more than 30-40% in the past.
