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Treasury Wine Estates Growing With Global Wine Interest

- By Holmes Osborne, CFA

Treasury Wine Estates Ltd. (TWE.AX) (TSRRY) (TSRYF) is an Australian wine producer. The company has well-known brands such as Penfolds and Beringer. The stock has gone gangbusters over the last several years.


The stock trades for 17.30 Australian dollars ($12.13), there are 717.9 million shares and the market cap is AU$12.419 billion ($8.7 billion). Earnings per share are 54 cents and the price-earnings ratio is 32. The dividend is 35 cents and the dividend yield is 2%.

Sales grew from AU$1.97 billion in 2015 to AU$2.5 billion last year. Pretty good growth. Earnings grew from AU$77.6 million to AU$360.3 million over that period, which is wonderful growth. Profit margins are 14.54% and the return on equity is 11.06%. Good profit numbers. Organic sales were up 16% last year.

The balance sheet shows AU$89.4 million in cash and AU$561.6 million in receivables. The liability side shows AU$315.7 million in payables and AU$875.3 million ($612 million) in debt. Free cash flow was AU$101.4 million and the free cash flow yield is 0.8%. The stock is very expensive based upon that metric.

Estates has a well-known line of brands, including Penfolds, Lindemans, Sterling, Beaulieu, Beringer, Acacia, Stag's Leap and Rosemount. The company has over 70 brands, sold 34.6 million cases and either owns or leases over 13,000 hecacters. Approximatesly 25% of sales come from Australia and New Zealand, 40% comes from the Americas, 13% from Europe and 22% from Asia.

Management is big on earnings before interest and taxes as a financial measurement. Ebit was AU$530.2 million last year and stood at a 21.8% margin. Management has as goal of growing Ebit by 25% in fiscal 2019 and maintaining a 25% Ebit margin going forward. Interesting goals. I don't ever remember a management team focusing so much on Ebit. It's usually sales, earnings or Ebitda.

Penfolds is the company's high-end brand. You can find bottles on the web for many hundreds of dollars. On the other end of the spectrum is the super cheap stuff--Lindeman's. Bottles on the web are a low as under $6.

The growth in China has been awesome. First-half profit was up 31%. Very impressive. Estates controls 5% of the Chinese market in wine. French wines account for 40% of sales in China, so Estates looks to purchase more French wineries.

Goldman Sachs is bearish on Estates. It believes the company will not make Ebit numbers due to slowing wine consumption in the U.S. and China. Goldman has a sell recommendation and a target price of AU$13.70. Yikes! They really don't like the stock.

Morgan Stanley thinks the stock is fairly priced. The firm thinks Estates will have problems growing without mergers and acquisitions and that the U.S. and China markets are mature. I tend to agree.

If you like the stock, try to buy in Australia. It only trades over the counter here in the States. It would be more liquid in the Land Down Under.

About four years ago, I wrote on Seeking Alpha that Estates was fairly priced at AU$5.16. Since then, the stock has increased 3.35 times. Boy, was I wrong. The company has been a growth monster. I wish we'd bought shares.

I like Treasury Wine Estates. Again, I'm not buying because I think the stock is expensive, but last time I thought that, I was wrong. I like alcohol stocks because they are resilient. There is a theory that alcohol stocks make money in good times because people are happy and drink and bad times because people are sad and drink. That's not exactly true. In bad times, people will drink less Penfolds and more Beringer. The margins are in the high-end brands.

Disclosure: We do not own the stock.

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This article first appeared on GuruFocus.