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Treasury Wine Estates: Why Morgan Stanley turned bullish on the stock

We examine some of Treasury's recent business developments and why one top investment bank recently turned bullish on the iconic winemaker and distributor.

TWE Source: Bloomberg

A bitter period for Treasury

The last twelve months have been volatile for Treasury Wine Estates (TWE), as a confluence of factors see investors abandon the stock. Mind you, even though the wine maker has seen its share price come off around 34% in that period – certain analysts remain optimistic about the company’s upside potential.

Looking back, in March the company withdrew its earnings (EBITS) growth guidance, in April and May the company revealed it was subject to two shareholder class action lawsuits; and last Thursday, as part of its latest business update, TWE revealed it expected FY20 earnings (EBITS) to come in at between $530 million and $540 million.

For reference, in fiscal 2019 Treasury reported EBITS of 681 million.

Mind you, while earnings are expected to lag in FY20, the iconic Australian winemaker and distributor has seen some positive trends emerge in recent times.

For one, in China, consumption and depletions have both trended up from their February-March lows; in the US, retail sales have seen impressive value and volume growth since March; and in Australia, retail channel performance remains strong, though the firm's luxury wine segment has struggled, relative to FY19.

Elsewhere, the company said work being undertaken on the previously announced Penfolds de-merger continues to ‘validate the expectation that value will be created through a separate focus for both Penfolds and TWE's other brands, globally.'

Treasury’s finalised full-year results are set to be released in August.

Regardless of the above points, investors bid the stock lower in the wake of last week’s business update, falling 2.9% and 3.9% on Thursday and Friday to finish the week at $10.520 per share.

On Monday the stock opened higher, trading up around 3% a little before noon.

Treasury Wine Estates share price: the broker take

In a note released on Monday, analysts from Morgan Stanley (MS) argued that while TWE’s outlook remain somewhat uncertain – the company boasts good valuation support from both its wine inventories and vineyard assets; and is currently trading on a compelling multiple based on its own historical averages, global peers and the broader Australian market. TWE currently trades on an FY22 price-to-earnings multiple of ~17x, compared to its global peers of ~22x, according to MS.

Valuations aside, the investment bank did note that ‘a sustained re-rating will require increased conviction that management can stabilise the US business. Further, there is scope for near term disruption to 'brand Australia' for the Chinese consumer and on this basis we may be early.’

In spite of those headwinds, Morgan Stanley currently has a Overweight rating (up from Equal-weight) and a $13.50 price target on Treasury.

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