11 September 2020
by Bruce Williams
This month we focus on Treasury Wine Estates (TWE). It’s a stock that, just like many others, has seen its price drop during the recent market correction. But it’s also a company that has strong potential.
TWE is a company that engages in the production and marketing of wine across 4 geographic segments – Australasia, The Americas, Asia and Europe.
Its primary focus is taking advantage of “premiumisation” of wine through its portfolio of brands such as Penfolds. As the company can source grapes from multiple countries, it has the competitive advantage of being able to tailor wines to suit local tastes. The consumption of better quality wines is growing at a higher rate. They also have the advantage of consistent margins and can be stored for longer. Because wine consumption in Asia is still well below developed market levels, this region is seen as a particularly strong opportunity for growth.
Risks to TWE’s short term earnings include reduced consumption due to Covid–19, management execution of recent changes to their US distribution model and competitive pressures from in-house brands within its lower quality commercial segment. The primary long-term risk is that their stored premium wine representing inventory, is not worth its current carrying value. This is an extremely large asset on their balance sheet.
We believe that a major competitive advantage going forward is that TWE is vertically integrated. They not only control the production of grapes, either through self-production or long term contracts with external growers, but they also control their brand through in-house distribution. This allows TWE to invest in their brand to deliver market share gains.
At its current price we believe TWE demonstrates good value, especially considering that it has multiple growth levers including pricing power, change in sales mix to premium brands, increased volumes and underpenetrated markets.
- Vertically integrated wine company
- Portfolio of brands including Penfolds
- Exposure to both established and growing markets
If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.