Treasury Wine Estates down the gurgler

Share price slammed after CEO leaves

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 23, 2013 12:56 pm AEST

The maker of Penfolds, Lindemans and Wynns wines, Treasury Wine Estates (ASX: TWE) has seen its shares slammed, after chief executive David Dearie announced he was leaving immediately.

Shares in Treasury Wine dropped as much as 9% following the news, although had recovered somewhat to be down 5.7% at $4.48 at lunchtime. Mr Dearie became chief executive in May 2011, following the de-merger from Foster's Group.

In July this year, Treasury Wine shocked the market, announcing $160 million in writedowns on its US inventories, including $38 million in rebates to sell wine it wasn't going to destroy, and $33.8 million for the destruction of old and obsolete inventory. Then in August the company announced a profit downgrade of around 12%, despite a reasonable outlook for the company in all regions except the US.

Consumers in the US are increasingly opting for the higher priced luxury wines, and 'masstige' brands, leading to a glut of cheaper wine. Treasury Wine's US business has become its Achilles heel, after Foster's spent a whopping $2.9 billion to buy Beringer Wine Estates in 2000.

In 2001-02, Beringer was estimated to have made $280 million in earnings before interest and tax (EBIT). Analysts now estimate it is generating just $40 million in EBIT, as it loses market share to bigger competitors including Constellation Brands, The Wine Group and E&J Gallo. The US business is now estimated to be worth one-third of what Foster's paid for it, at just $1 billion, having lost an estimated 50% of its market share.

Back home in Australia, Treasury Wine is faced with a wine oversupply, according to the Winemakers' Federation of Australia. Chief executive Paul Evans says the 2013 grape harvest was well above the six-year average and will place further downward pressure on prices and profitability.

Whether a new CEO can fix Treasury Wines' US issues remains to be seen, but it seems the company is at a disadvantage in that market, being too small to compete effectively with its much larger rivals. It's unlikely that Treasury Wine will sell off its US division, given the size of the US market.

Foolish takeaway

Australian companies don't have a great record expanding offshore, and Treasury Wine can be listed alongside them. Think National Australia Bank (ASX: NAB) and its forays into the US and UK and Insurance Australia Group (ASX: IAG) and AMP (ASX: AMP) and their doomed UK moves. The lesson for Foolish investors is to be wary of Australian companies moving offshore.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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