Southcorp's rocky patch
Recommendation
We are not so fickle, though, and still have great faith in this company. After all, even with sales falling to $2.62bn in 1999/2000, net profit after tax was up 14% to $205m, and total dividend was a cent better at 21 cents, fully franked (franking cuts to 50% this year due to high overseas earnings).
The sales breakdown gives us comfort as well. Sales of wine - the company's strong suit after all - grew 7% and EBIT was 6% higher, as against total company EBIT growth of 1.6%. Things can only get better as the company turns its attention more and more exclusively to wine. Announcing the results, CEO Graham Kraehe signalled that the company's packaging businesses are likely to be sold this financial year.
Pipped at the post
As for being pipped at the post by Foster's acquisition of Beringer, it's true Southcorp had been sniffing around this US major. That it didn't rush in suggests that the company was concerned by the sheer scale of the investment. The deal is discussed above in the article on Foster's, but the long and short of it is that the jury's still out. Beringer cost a staggering $2 billion. That's an awful lot of wine to have to sell to get a return on investment. The rumours before the takeover were that Southcorp was considering buying Beringer in conjunction with American wine company Kendall Jackson. We like this conservative thinking: sharing the burden of such a big acquisition is always a good idea and when it comes with local market knowledge through an American company, it is even better.
The Foster's move will not have stopped Southcorp's acquisition ambitions, but it does make a move in the US that much more unlikely - there are a limited number of possibilities there. Don't be surprised to see them make moves in to France or elsewhere in Europe.
So, while it may have seen a slightly rocky patch, we have few concerns. Rather, we think that it has made the stock more attractive. At $4.34, 8.8% down on issue 57 (Accumulate - $4.76) the stock is testing a support level of sorts and we would not be surprised to see a turnaround soon. For these reasons we maintain our ACCUMULATE recommendation.