Motley Fool Australia

The Treasury Wine share price and this ASX 200 stock are the latest to be hit by broker downgrades today

child making thumbs down gesture with grimacing face
Image source: Getty Images

The S&P/ASX 200 Index (Index:^AXJO) lost ground in after lunch trade today but the Treasury Wine Estates Ltd (ASX: TWE) share price is hit harder.

The top 200 benchmark dipped 0.3% while shares in the alcoholic drink supplier slumped 4% to $10.52 after one of its biggest supporters downgraded the stock.

UBS cut its recommendation on Treasury Wines to “neutral” from “buy” on the back of management’s dismal trading update.

Downgrades come in threes

The company expects FY20 EBITS (earnings before interest, tax, the agricultural accounting standard SGARA and material items) to range between $530 million and $540 million. This is around 6% below consensus forecasts.

That doesn’t sound like much, but the broker believes there is a chance of a further profit warning for its Americas business.

The broker believes about 60% of the weakness in sales in that region is driven by the COVID-19 pandemic. But Treasury Wine is also losing market share and the industry is in oversupply.

While UBS still believes the stock represents a longer-term opportunity, it acknowledges the lack of near-term catalysts for the stock. The broker’s price target on TWE is cut to $11.80 from $14.80 a share.

Powering down

Meanwhile, the AGL Energy Limited (ASX: AGL) share price is trading flat even as Macquarie Group Ltd (ASX: MQG) downgraded it to “underperform” from “neutral”.

The fact that the electric utility isn’t falling harder may be due to the perceived defensiveness of its business during these highly volatile times.

But AGL may be proving a false sense of security as Macquarie believes its earnings are at risk of falling when customer contracts come up for renewal.

Earnings shocker

Spot electricity prices are significantly lower than the contracted price due to weakening demand from ongoing recession (short-term impact) and the growth of renewables and battery storage (longer-term).

AGL’s expiring contract with Alcoa only adds to its woes. The broker estimates that Alcoa is paying   around $55 to $60 per megawatt hour under the contract and this could drop to circa $40/MWh when it resigns.

That equates to an up to $80 million earnings hit for AGL in FY22 if AGL resigns the aluminium producer as a client.

Macquarie’s 12-month price target on the stock is $15.91 a share.

If you are looking for better priced ASX stocks to buy for FY21, the experts at the Motley Fool have picked some of the favorites for the year ahead.

Click on the link below to find out for free what these stocks are.

Forget what just happened. We think this stock could be Australia's next MONSTER IPO...

One little-known Australian IPO has doubled in value since January, and renowned Australian Moonshot stock picker Anirban Mahanti sees a potential millionaire-maker in waiting...

Because 'Doc' Mahanti believes this fast-growing company has all the hallmarks of genuine Moonshot potential, forget 'buy now pay later', this stock could be the next hot stock on the ASX.

Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and 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.

Related Articles...

Latest posts by Brendon Lau (see all)