The Treasury Wine Estates Ltd (ASX: TWE) share price is marching lower today, down by 2.37% to $10.73 at the time of writing
This drop is likely being somewhat driven by the broader losses associated with the S&P/ASX 200 Index (ASX: XJO) today, but a top broker’s rating of “Overweight” for the stock this morning is definitely adding to the Treasury Wine share price’s woes.
What did the broker say?
A note out of Morgan Stanley revealed that wine exports to China were down by as much as 16% in the June quarter on a year-on-year basis. Notably, Morgan Stanley saw this as a better than expected result, and in fact an improvement relative to the previous March quarter.
Although the broker didn’t specify the likely causes behind this, the 2 that come to mind are the diminished consumption of premium wines in Asian markets due to COVID-19 restrictions, as well as heightened Australia–China diplomatic tensions generally creating a headwind for exports.
The company has forecast a 14% decline in FY20 operating income for its Asian markets to reflect the greater difficulty in one of its key operating environments.
Despite lower consumption, Morgan Stanley retained a current price target on Treasury Wines at $13.50, suggesting the stock may be currently undervalued by as much as 25%.
In providing a forecast for the coming 12 months over FY21, the broker expected full-year dividends of 29.70 cents per share, and earnings per share of 46 cents. On this basis, Treasury Wines could foreseeably pay out a 2.7% fully-franked dividend yield to its shareholders over the next year.
Should you invest?
I’m a big fan of the brands sold by Treasury Wine, including most famously Penfolds, Wolf Blass and the less well-known 19 Crimes brand.
While the company has been hard-hit by this year’s bushfires and Australia–China diplomacy, I see a lot of upside for the company to perform strongly over the medium to long-term. The Penfolds brand has been liquid gold for Treasury Wine for decades, and I expect this to continue to a large extent moving forward.
Notwithstanding this, I expect the wine-maker to take a short-term hit for FY20 and FY21 due to the current economic recession and the impact this has on consumers’ willingness to spend on luxury goods such as expensive wines.
Thus, now may be the time for prospective investors to buy into Treasury Wine, with the hope the Treasure Wine share price may get back to its September 2019 highs of as much as $19.47.
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Motley Fool contributor Toby Thomas owns shares of Treasury Wine Estates Limited. 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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