Australian vintner Treasury Wine Estates (TSRYY, Financial) is down in price because of a massive tariff imposed by China. The Chinese governmet is still sore over comments about the origins of the Covid-19 virus. Treasury has a strong portfolio of wines and the stock should do well regardless.
The stock trades for 10.84 Australian dollars ($8.44), there are 722 million shares and the market cap is AU$7.8 billion. The forward dividend is 30 cents and the dividend yield is 2.77%.
Sales were AU$2.4 billion in 2018, AU$2.88 billion in 2019 and $2.65 billion in 2020. The fiscal year ends in June, so you can see the pandemic affected Treasury in 2020. Operating income margins were 22% in 2019, which is very profitable.
Management released a report that projected fiscal 2021 earnings before interest and taxes would be between AU$495 million and AU$515 million. Very profitable! Management has a goal of high single-digit earnings growth. Penfolds is broken out separately because Treasury may spin off this division. Sales were AU$765.2 million last year and had an Ebitda margin of 47%. The American depositary receipt in the U.S. jumped 7% on Friday after this report was released.
Well-known brands include Lindemans, Sterling, Penfold's, Acacia, Wolf Blass and Beringer. Most American wine drinkers would recognize these brands.
The balance sheet is rock-solid. Cash and receivables are a little over AU$1 billion. Inventory, namely wine, is about AU$1 billion. Payables and debt are about AU$1.7 billion. I like that balance sheet.
According to a Morgan Stanley report, exports to China dropped 95%. China's Minister of Commerce announced anti-dumping measures on Australian wine. Treasury's duty is 169%. Other vintners from Australia have tariffs of 107% to 212%. Excluding China, Treasury's year-over-year growth in March was 7%. At the end of April, Morgan Stanley had a target price of AU$10, which the stock just blew through.
Treasury got American rapper Snoop Dogg to sponsor its 19 Crimes and Cali Red. He has posted the wines on his various social media accounts. Cali Red has been a huge hit with the help of the rapper.
A great article came out in Morningstar on May 7. Jun Bei Liu of Tribeca Investment Partners thinks the stock is worth double what it's trading at. He discussed how much the Chinese love the product at that there were talks of Pernod Ricard (PDRDY, Financial) making an offer. Adam Fleck of Morningstar is a little more cautious and notes that Treasury does not have a moat in the wine business.
I love the stock. The spat with the Chinese I think will come to an end. China needs Australia's iron ore and other commodities to satiate its growth appetite. Treasury has a strong brand-name portfolio. I think either Treasury gets bought out, it spins off its U.S. portfolio or they make nice with the Chinese and growth takes off.
Disclosure: We own stock.
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
