The Treasury Wine Estates Ltd (ASX: TWE) share price dropped 4.4% to $14.03 today despite the wine grower and retailer not releasing any specific news to the market.
Growth shares (generally on high price-to-earnings multiples) have been hammered over the last quarter of calendar year 2018 with Treasury Wines' shares down around 29% since highs above $19 in September.
The Treasury Wines share price fall is all the more curious given China officially reduced tariffs on wine imports from Australia to 0% on January 1 2019.
This is a significant boost for Treasury's key and lucrative export market as it effectively means it can sell its products cheaper at the same profit margins, or at higher profit margins at the same price.
In the high-end wine retailing industry in China price and quality are indivisible in the consumer mindset, so discounting wines in response probably wouldn't make sense.
Treasury had an impressive FY 2018 growing earnings per share 36% to 49.7 cents, and it's forecasting 25% growth in earnings before interest and tax in FY 2019. This is also impressive, with analysts' average forecasts coming in at 64 cents per share in FY 2019. This places it on 22x forward earnings even after the heavy share price falls.
This may appear reasonable value for a 'growth stock', but it's investor worries that China and its big spending middle class may be slowing down that's dragging down the share price. Yesterday consumer goods giant Apple Inc. warned that iPhone sales in China had collapsed amid general weakness in the country.
Furthermore, while Treasury's Penfold brand carries a lot of cache amongst Chinese consumers, French wines remain the first choice irrespective of actual quality. This is a competitive advantage hard for Treasury to change over the medium term, without a huge marketing spending.
Finally the outlook for Australian consumer spending in 2019 is not so great on the back of falling house prices and stagnant wages growth.
