TWE shares are in the red so should you buy, hold or sell?
Treasury Wine Estates (TWE) is a global leading listed premium wine company with approximately $2.5 billion in revenue per year.
TWE has three key divisions:
- Penfolds: a luxury wine brand with global sales presence and strong brand recognition in Asian, Australian and New Zealand markets.
- Treasury Americas: a portfolio of premium and luxury wines in the Americas region including the likes of innovative 19 Crimes and Matua.
- Treasury Premium Brands: a portfolio of commercial and premium wine brands with solid growth potential focused on the Australian and New Zealand, and European markets. The stock has delivered a return of over 320 per cent, since it listed on the ASX in 2011 after having been spun off from Foster's.
Why we like it
TWE is our key pick in the consumer sector due to its iconic portfolio of luxury brands, including most notably Penfolds.
Despite several challenges in recent years with the implementation of China import tariffs of approximately 100-200%, the company has shown strong execution capability to reinvent the business and we believe that it is now ripe for double digit earnings growth.
Additionally, the earlier-than-expected relaxation of China import tariffs provides further earnings upside possibilities. TWE is not expensive on traditional valuation measures and is attractive relative to its historical average and international peers.
Key strategic advantages
We believe TWE has three strategic advantages that set it apart.
1. A portfolio of iconic brands
TWE has a portfolio of global iconic wine brands. Additionally, TWE has been expanding its portfolio of leading luxury brands including Stag's Leap, BV and most recently the acquisition of Frank Family Vineyards.
Finally, the company has also shown an increasing capability to innovate with 19 Crimes built organically into one of the most well-penetrated premium brands in the US with good reception from younger consumers.
2. Great management team
Management's strength is visible through the structural reinvention the company has undergone in the last several years. In 2021, TWE's China business almost evaporated overnight when the Chinese government implemented the import tariff of approximately 100-200% to Australian imported wine.
In the last two years, the company was able to redirect and build a more robust business in the rest of APAC without significantly hemorrhaging the Penfold business sales or profits.
3. China remains a key opportunity.
We continue to expect that China will be a key growth opportunity for TWE.
While it is too early to tell whether China import tariffs for Australian wine will be relaxed ahead of its current scheduled expiry in March 2026, if that does happen, and TWE is able to deliver sufficient supply earlier than expected, we see substantial upside possibilities to the group earnings.
Inflection point for Treasury Wine Estates
We believe TWE has reached an inflection point in terms of growth trajectory.
Since 2018, the company has undergone large structural transformation primarily in its APAC and Americas business.
This restructuring was focused on divesting out of the Americas lower-end commercial wine portfolio (FY21) as well as diversifying its Mainland China Penfolds business upon China implementing the import tariff first announced at the end of 2020. As a result, the growth of the business, both sales and EBIT has largely been flat.
We believe that it is now at a point of inflection and is expected to grow profits double digit over the next five years. Additionally, the company has a very strong balance sheet and we expect capital return opportunity in the next few years.
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