Treasury Wine share price celebrates Friday with a more than two-year high

The Treasury Wine Estates Ltd (ASX: TWE) share price is making its sixth consecutive day of gains as it races to its highest level since early 2020.

What is probably helping today is a favourable report by Morgan Stanley following the winemaker's full-year results, which was released yesterday.

While the broker noted that Treasury Wine's FY22 report card was in line with market expectations, Morgan Stanley's confidence in its outlook for the current year is improved.

Why the Treasury Wine share price is rallying to new highs

This was enough for the broker to reiterate its overweight (or buy) recommendation on the Treasury Wine share price.

Shares in the company jumped 3.3% to $13.57 during lunchtime trade when the S&P/ASX 200 Index (ASX: XJO) inched up a modest 0.1%. 

Getting high on the pleasing FY22 result

Treasury Wine posted a 3.6% decrease in net sales revenue to $2.5 billion. But its earnings before interest, tax, SGARA and material items (EBITS) was up 2.6% to $523.7 million. The EBITS was slightly ahead of consensus expectations of around $521 million.

What's perhaps more pleasing was the company's move to increase prices for some of its wine. The move comes as rising costs have been crimping the profit margins of many other ASX 200 companies.

The price increase will have a greater positive impact on Treasury Wine's FY23 performance than FY22, noted Morgan Stanley.

Higher margins await the Treasury Wine share price

This is partly because costs of goods sold (COGS) is likely to be flat this financial year, before improving in FY24. Lower domestic grape prices and cost-cutting are expected to offset underlying inflation.

Morgan Stanley commented:

FY22 results were largely in line with consensus expectations. However, our confidence around the delivery of sales growth and margin expansion in FY23-24e has improved given incremental guidance on COGS and the outlook for NSR [net sales revenue] growth.

Capital return potential and valuation

Further, there is potential for Treasury Wine to consider capital management initiatives in FY23. This might be a share buyback or a special dividend.

The Treasury Wine share price has gained 8.5% over the past year. That's better than the ASX 200, which is nursing a 4.6% loss. 

Morgan Stanley's 12-month price target on Treasury Wine is $13.80 a share.