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Is this ASX stock better placed to rally than the Treasury Wine share price?

Those looking for an alternative stock to the Treasury Wine Estates Ltd (ASX: TWE) share price won’t have to look far as Morgans picked Australian Vintage Limited (ASX: AVG) as one of the winners from last month’s reporting season.

Don’t get me wrong – I think Treasury Wine delivered a solid result too and that stock looks cheap in my view (and that’s why I own the stock), but not many investors may have picked up on Australian Vintage as the small cap wine producer hasn’t done much over the past month.

But that changed today with the AVG share price breaking out of its trading band to jump 4% to a more than four-month high of $0.52 cents after Morgans reiterated its “add” recommendation for the stock even as it lowered its price target to $0.62 from $0.64 per share.

Overlook the bad weather

“AVG posted a very strong interim result with NPAT +46% (6.5% beat to us) and EBIT +27% to A$11.8m (8.3% beat). The strong EBIT growth was achieved despite a SGARA headwind of A$0.5m,” said Morgans.

“Revenue rose 8% and gross profit was up 11% as AVG reduced loss-making bulk wine sales, increased sales of core brands (+14%), and improved its sales mix.”

Self-generating and regenerating assets, or SGARA, was a big problem for the group and is the key reason behind management’s FY19 earnings guidance cut. Without this, Morgans would have upgraded its earnings forecast and valuation on Australian Vintage.

But the higher than expected SGARA doesn’t take anything away from the positive underlying fundamentals of the stock, not according to Morgans.

The rise in SGARA is due to extreme heat and dry conditions in December and January, plus the frost in October.

Growth momentum intact

While the weather is outside of management’s control (and hopefully will be less of an issue this year), things that are under its control have gone very well with the result from its UK and European operations a clear standout.

“In a highly competitive wine market, EBIT rose 36% to A$6.4m due to strong performance of its McGuigan brand (third largest global brand in the UK) and increased distribution,” said Morgans.

“The progress in Asia was also a highlight with EBIT +85% to A$1.2m and now more than 10% of group earnings. Operating cashflow was again strong at A$10.9m and supported the group’s winery expansion at Buronga Hill.”

Despite the adverse SGARA impact, the stock is looking cheap as its trading on a circa 33% discount to its trailing net tangible asset backing – and Morgans claims that’s too cheap to ignore.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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.

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