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Treasury Wines shares are down 31% this year. Are they a buy today?

Nikhil Gangaram
glass of red wine spilling

The Treasury Wine Estates Ltd (ASX: TWE) share price has plummeted more than 30% since the start of 2020 and is currently trading at 52-week lows. The Australian winemaker has come under pressure recently on the back of the coronavirus outbreak and softer earnings.

Despite the doom and gloom, the Treasury share price could warrant a potential buy for the long term.

Why is the Treasury share price dropping?

Late last month, Treasury Wines notified the market that the company had experienced weak trading conditions in the US, which would impact its earnings for the first half of FY20. Treasury revised its guidance for net profit after tax (NPAT) to $229.2 million and provided a revised forecast for earnings before interest and tax (EBIT) of $366.7 million.

In addition to a profit downgrade, the Treasury share price has also been sold on the back of the coronavirus outbreak. Investors have been quick to offload shares in the Australian winemaker, which exports heavily to the lucrative Chinese market.

How has Treasury performed?

Treasury reported its earnings for the half year last week. In accordance with the company’s revised guidance, Treasury’s performance was softer than originally expected. Despite reporting a 2% increase in net sales revenue of $1,536.1 million, Treasury saw a 1% decline in net profit for the 6 months ending 31 December. The company also reported a 6% increase in EBIT of $366.7 million at a margin of 23.95%.

The Treasury results were driven by strong performances across Asia, Australia and New Zealand, with wine sales to China climbing 12% for the half to $1.28 billion. As highlighted earlier by Treasury, more challenging conditions in the US impacted the company’s overall performance. Increased competition in the market saw EBIT in the US decline more than 17% to $98.3 million for the first half.  

The outlook for Treasury Wines

Treasury could see a potential impact on sales as the coronavirus outbreak forces people in large Chinese cities to avoid public places and restaurants. However, as alluded to by Treasury CEO Mr Michael Clarke it is difficult to predict the degree of impact. Last year Treasury saw sales in Hong Kong grow when many predicted the opposite given protests and riots in the city.

According to Treasury, sales in China are mainly driven by demand for its luxury and prestige brands such as Penfolds. Management noted that the company has the flexibility to allocate luxury wines to a later fiscal period in order to deliver sustainable earnings growth.

In order to avoid a repeat slide in margins as experienced in the US, Treasury is undertaking an internal separation of its lower-priced commercial wines from its luxury brands. In the long-term, Treasury is well poised to take advantage of its growing and lucrative market. A revised distribution strategy and expanded product range could see the winemaker poised to prosper.

Should you buy?

In my opinion, it can be dangerous trying to ‘catch a falling knife’. Current macro and micro factors could see more volatility and potentially more downside for the Treasury share price.

However, despite the current sentiment, I do think that Treasury Wines could offer great long-term value for investors. I think a prudent strategy would be to keep an eye on Treasury Wines, wait for the share price to consolidate and let positive price action dictate before making an investment decision.   

The post Treasury Wines shares are down 31% this year. Are they a buy today? appeared first on Motley Fool Australia.

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Motley Fool contributor Nikhil Gangaram 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