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Is Treasury Wine Estates a potential takeover target?

Kate O'Brien
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Speculation has surfaced that Treasury Wine Estates Ltd (ASX: TWE) could be a takeover target. Shares in Treasury Wine have fallen from highs of over $19 last year to just above $11 currently after the company missed half-year earnings expectations and revised full-year guidance downward. 

Attractive assets

According to The Australian, a US rival could make a bid for Treasury Wine if its share price keeps falling. Treasury Wine owns the luxury Penfolds brand which is attractive to would-be buyers.

Further, Treasury Wine’s Asian distribution channels are a drawcard, with The Australian reporting the company is the biggest-selling winemaker in China. 

Outlook uncertain

Yet the outlook for Treasury Wines is far from clear, with the coronavirus weighing on second-half results. While last week the company said it was too early to assess the financial impacts of the outbreak, it has admitted that a sustained material impact on consumption would impact FY20 earnings. 

The Australian Financial Review (AFR) has reported that Citi estimates Treasury Wine Estates could see profits fall by $15 million due to the coronavirus outbreak. China is the company’s most profitable market, with its luxury and prestige wines including Penfolds particularly profitable. 

Citi estimates that Treasury Wine Estates makes about $22 million in profits each month in China but expects volumes in China to fall by around 20% over the next few months. The AFR reports that Citi has cut Treasury’s forecast earnings growth for 2019-20 from 6% to just 1%, and cut its 12-month price target to $12.30 from $13.70. 

Forecast growth down

Treasury Wine Estates saw its shares fall dramatically following the release of revised guidance in late January. Forecast growth, which had been up to 20%, was revised down to closer to 5%. This was driven by underperformance in the US in the first half which is expected to continue in the second half. Treasury Wine makes around 27% of its profits in the US. 

An oversupply of cheap wine across the US caused a flood of cheap private labels to enter the market. The larger than expected Californian grape harvest in 2019 and Trump’s trade war with China have exacerbated the US wine glut. Treasury Wine CEO Michael Clarke estimates the oversupply will take approximately 2 years to clear.

Higher levels of discounting were required to try to maintain market share across all price points, and Treasury Wine’s US profits slid by around 17% for the first half. CEO Clarke commented, “our first half performance in the Americas has been a setback and is disappointing given the high expectations for we have for growth in this important market.”

Foolish takeaway 

The Treasury Wine share price ended the day slightly higher, up 0.53% to close at $11.35. This brings the company’s share price fall to 32% since releasing the trading update last month.

While Treasury Wine Estates faces headwinds in both the US and China, its share price is unlikely to recover its previous highs. This could make it a takeover target for rivals. 

The post Is Treasury Wine Estates a potential takeover target? appeared first on Motley Fool Australia.

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020