Morningstar | Treasury Wine Reiterates Outlook at AGM, Tracking Our Expectations; Shares Remain Overvalued
No-moat Treasury Wine Estates remains on track to hit its fiscal-year 2019 outlook for 25% underlying operating income growth, in line with our expectations, after reiterating this guidance at its annual general meeting. But we caution that despite a nearly 15% decline in the company’s share price since reporting full-year fiscal 2018 results in mid-August, we continue to believe Treasury’s stock remains overvalued versus our unchanged AUD 11.70 fair value estimate.At the AGM, management noted first-quarter results were tracking according to full-year plans, and reiterated its bottom-line guidance. The firm expects earnings before interest, taxes, and expenses associated with the valuation of self-generating and regenerating assets, or EBITS, to grow 25% this year, and continue to progress longer-term towards an EBITS margin of 25% versus 21% in fiscal 2018. This outlook matches our forecast margins of 25% by fiscal 2021, and we expect even further improvement to nearly 27% by fiscal 2023.
However, our projections imply slowing growth from the 25% compound annual growth rate EBITS has enjoyed over the past five years. After fiscal 2019, we forecast EBITS climbing at a 15% average annual rate in the three fiscal years from 2020 through 2022. Although we expect Treasury can continue to grow its revenue at an 11% annual pace over these years, matching our outlook for fiscal 2019, we see more limited positive impact from a mix shift toward higher-margin luxury wine away from lower-margin commercial products given the company’s already strong inroads in doing so.
With this slowing growth outlook, we think the market’s implied forward price/earnings multiple of 26.5 too richly values the stock. Our implied multiple of 18.6 at our fair value estimate instead recognises the strong, but slowing, earnings growth, while also considering the potential for further competition, execution risk, and pricing pressure in low- and midrange wine.
Treasury Wine Estates is engaged in viticulture and winemaking, and the marketing, sale and distribution of wine. Co.'s wine portfolio includes wine brands such as Penfolds, Beringer, Lindeman's, Wolf Blass, Stags' Leap, Chateau St Jean, Beaulieu Vineyard and Sterling Vineyards. Co. also distributes beer and cider under license in New Zealand and provides contract bottling services to third parties. Co. maintains its operations in four regions: Australia and New Zealand, Asia, Europe, and Americas.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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