Treasury Wine Estates' morning after

Once again, Treasury Wine Estates has been delivered a kick from its underperforming American division.

The hangover is starting to kick in.

After busting free of Foster’s two years ago, following years of underperformance and massive write-downs, Treasury Wine Estates has pleasantly surprised investors with its stock price outperforming the market amid optimistic noises about vast opportunities in Asia.

But the problems that have haunted the group ever since Foster’s ill-fated launch into wine once again have returned.

The American division, Beringer, has been a constant source of disappointment from day one after being purchased for a ridiculous price.

Now questions are being asked as to whether the company should jettison Beringer given its market share has roughly halved in the past six years.

This morning, Treasury confirmed everyone’s worst fears that it would take a $160 million hit to its earnings because of excess American inventory, where old stock has clogged its distribution network and depressed sales.

The stock price sank on the news, down more than 8% to $5.36 in early trade, more than $1 below its mid-May peak.

Treasury has two options, neither of which are particularly palatable. Either it sells Beringer and takes yet another hit on the value of the business, or it prepares to spend a large amount of cash to rejuvenate it.

The company has benefitted hugely from the recent drop in the Australian dollar, with most analysts upgrading earnings forecasts to account for the currency shifts (see Tim Treadgold's In vino, value?).

As an indication of how important those shifts are, Treasury is estimated to derive around 80% of its sales volume in Australia but more than 40% of its earnings in the US.

From an intrinsic value point of view Treasury trades on massive premium, which some analysts estimate at around 60%.

On a price-earnings basis, at around 25 times earnings, Treasury Wine Estates is valued at roughly double many of its peers.

While Treasury boss David Dearie this morning attempted to gloss over the earnings warning – pointing to EBITS being in line with analyst expectations – there is no escaping the fact that serious problems continue to dog the American division and that next year shipments will be lower.

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