Treasury Wine Estates share price: what drove the 29% sell-off?

As almost a third of Treasury’s market value is erased, we examine what first drove this vicious sell-off.

It came in three waves.

Prior to the market open last Monday, Treasury Wine Estates Ltd (ASX: TWE) – now with a market capitalisation of $9.01bn – saw its share price fall ~6%.

Things didn’t fare much better on 29 Wednesday. Here, the company guided for lower FY20 earnings and its stock fell again, this time dropping a more significant ~24%.

Now, as of 15:33 (AEDT) today, TWE is down as much as 29.77% since last Monday – to $12.43 per share.

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The catalyst

The specifics behind these declines? Treasury last week noted that the company now expects earnings (EBITS) growth in the 5-10% range for the 2020 fiscal year. The company has previously guided for earnings growth of between 10-15%.

Treasury noted that this downgrade was due to ‘challenging conditions in the US wine market.’

Though distinctly negative, Michael Clark – the company’s exemplary but soon-to-be-departing CEO, noted:

‘The results announced today demonstrate the continued momentum behind our premiumisation strategy across all market, and the strengths of our diversifies, global business model.’

‘We remain focused on our journey of sustainably growing earnings, but for F20 and Fy21, at slower growth rates than previously expected,’ Mr Clark, also said.

Though weaker guidance, TWE’s Board last week announced an interim dividend of 20 cents per share (fully franked) – representing a 11% increase on a PCP basis. That, evidently didn't help much with the sell-off.

Sales in focus

Besides guiding for lower FY20 earnings as part of last week’s release, the company saw first-half sales and earnings come in modestly higher, on a reported currency basis.

On the top-line, TWE reported net sales revenue of $1,536 million – representing a 1.9% increase on a PCP basis. On a constant currency basis however, revenue decreased 0.7% during the half.

Looking at a breakdown of sales per region we see that TWE’s Asia segment grew by 7.1%, Americas by 1.3%, EMEA by 0.7%; while ANZ declined by 2.4% during the first-half – also on a reported currency basis.

Earnings (EBITS) also rose modestly during the half, hitting $366.7 million (reported currency) – representing an increase of 5.7%, also on a PCP basis. Positively at least, earnings margins also trended up 0.9% during the period.

The analyst take

In response to these unaudited results, Macquarie Wealth Management downgraded their rating on the stock from ‘Outperform’ to ‘Neutral’.

The investment bank noted that the issues TWE is currently facing in its Americas segment are unlikely to be resolved in the short-term – and that coronavirus concerns are likely to weigh on ‘off and on-premise consumption.’

Macquarie currently has a 12-month price target of $13.30 per share on the stock, which at current price levels would imply some upside potential.

Australian wine data – due out in May – will likely be the next catalyst for the stock, posits the investment bank. Other than that, Treasury Wines (ASX: TWE) will release its 2020 interim results (audited) on 13 Thursday, February 2020.

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