The company is one of the world’s largest listed wine makers following its demerger from Foster’s Group in May 2011. TWE has four main geographical divisions; Australia and New Zealand (ANZ), the Americas, Europe/Middle East/Africa (EMEA), and Asia.
The Americas are the largest contributor of overall revenue (44%), followed by Australia at 35%, then EMEA around 15%, with the rest (~6%) being from Asia.
On Monday, TWE announced a $160 million write-down of its US business after ambitious sales forecasts saw it supply too much wine to the U.S. In response, the company was forced to destroy old inventory and offer big discounts to clear a glut of wine from the current stock.
As a result of the write-down, FY13 operating earnings were likely to be around $216 million, barely higher than FY12’s $210.2 million and weaker than the mid-single digit growth TWE forecast during February’s 1H13 results presentation.
The downgrade raises serious doubts about management’s outlook for the US business, which now appears to have been overly optimistic.
Valuation & outlook
Whilst there has been general improvement in the US economy, demand for TWE’s wines has not kept pace with the rate of shipments and the problems have come home to roost.
Even after its profit downgrade, TWE is trading on a one-year forward P/E of 21x, which we think is still too high. The write-down has affected FY13 earnings, but TWE also warned that earnings in the current financial year were expected to fall by up to $30 million due to anticipated lower shipments to the US.
Can TWE make up the slack from its other divisions, like Australia? We don’t believe so. Australia still faces a supply glut, which is likely to keep selling prices at home low, pressuring profit margins.
Also, TWE has set aside $40 million in discounts and rebates to its US distributors to help clear out the excess stock.
Given that it’s the cheaper US labels that are in excess supply, TWE will find it hard pressed to raise prices in the future without suffering a consumer backlash.
Unfortunately for the company, higher prices may be needed to recover lost profit margin. Amid uncertainty about how the current US problems will affect future profitability, we think TWE is still overvalued even after its price drop and fear more declines may be in store for its share price.