The chairman of Australian Vintage (ASX: AVG), Ian Ferrier, told his company's AGM on Wednesday that a high Australian dollar and continued oversupply throughout the industry had created a "protracted downturn" for wine businesses in recent times. However, he also forecast the company was positioned for growth as the economic cycle turns and the hangover lessens.
Evidence of the economic cycle potentially turning comes from an intergovernmental organisation — the International Organisation of Vine and Wine. Apparently, old-world European populations now consume less wine, while the Pacific markets, including the US and China, consume more.
Global wine consumption is now beginning to increase following years of steady, post-GFC decline. Remarkably, global production in 2012 was at its lowest level since 1975. These trends may tip the previously skewed supply and demand ratio back in the wine makers' favour.
Australian Vintage is the company behind the McGuigan and Tempus Two brands, and made a net profit of $7.1 million in financial year 2013. It recently guided that it expects profit to improve in excess of one-third in financial year 2014.
Earnings per share in 2013 were 5.3 cents, which would put the company on a low price to earnings ratio just over 8. In addition the company paid a fully franked 2.6 cents per share final dividend, placing it on an attractive yield of 5.9% at today's price of 44 cents. Equities broker Bell Potter reportedly has a price target of 55 cents on the business.
Investors looking for a more established business should consider Australia's largest wine producer, Treasury Wine Estates (ASX: TWE). It saw a share price slide after announcing a $160 million writedown to the market in July. This was due to excess inventory in its largest market of North America. Chief executive David Dearie was dumped not long afterwards with the company's strategy in the U.S being called into question. Low-cost competition from South American producers remains an issue for all Australian wine makers.
Investors had also been getting a little tipsy over Treasury Wine Estate's rapidly growing Asian sales, but news of the North American problems saw the price premium disappear. With solid long-term prospects, especially in Asia, the stock may be an opportunity at current price levels.
Foolish takeaway
Choose carefully and you can find a good wine at a good price. Company investors must also choose carefully and assess the risks. The weather, price competition, consumer trends and brand reputation among them. However, a weakening dollar and growing demand prospects mean these businesses are worth further research.
