Why has the Treasury Wine Estates share price been so volatile?

Treasury volatile following interim results

Treasury Wine Estates (TWE) saw its share price swing wildly after releasing its interim results to the market. Despite revealing declining earnings – the stock rallied during Thursday’s session before recoiling on Friday.

The stock finished out the week at $11.18 per share, down 6.13% for the session.

Ultimately, it’s been a difficult year for the wine maker. The coronavirus pandemic severely impacted Treasury’s operations during the early parts of 2020 and then, towards the end of the year, China announced significant tariff hikes on Australian wine imports. TWE saw its share price collapse, as investors feared the worst.

In this sense, the mood around TWE was already significantly lacklustre heading into the interim results release. The market’s positive response then, on Thursday at least, may suggest that these results were better than expected. Below we look at the headline figures from the interim release.

On the top line, TWE reported lower net sales, with revenue down 8% to $1,410.0 million for the half. The company attributed this decline to the issues highlighted above, namely the global pandemic as well as the impact of Chinese shipments as a result of 'anti-dumping and countervailing investigations initated by the Chinese Ministry of Commerce.'

Weaker revenue flowed onto the bottom-line: earnings (EBITS) was 23% lower, EBITS margins were lower at 20.1%, while reported profits (NPAT) and earnings per share (EPS) were both down 43%, at $120.9 million and 16.8 cents per share, respectively.

Despite a difficult half, TWE declared an interim dividend of 15.0 cents per share, representing a payout ratio of 62%.

Goldman remains Neutral, eyes $11.91 price target

Turning to the outlook, the company said it expected Chinese demand to remain 'extremely limited', while adding that it anticipates second half earnings (EBITS) to be lower than first half earnings. Despite that the company said it 'is becoming increasingly confident around its plans for reallocation of the Penfolds Bins and Icon range from China to other markets, with modest benefits to commence towards the end of' FY21.

Commenting on these results, analysts from Goldman Sachs retained their Neutral rating and $11.91 price target, saying 'Despite the significant decline in EBITS, the result was ahead of GSe and Visible Alpha Consensus.'

Adding further context to TWE’s second half EBITS expectations, the investment bank said:

'The ability to achieve this [EBITS] target requires TWE to re-label and reallocate the displaced Chinese products with minimal impact to profitability. We still see this as a risk.'