Treasury Wine Estates to double US earnings, according to BAML’s David Errington

Treasury Wine Estates will more than double its US earnings to $289m in 2019, according to BAML analyst David Errington.

Treasury Wine Estates CEO Michael Clarke.

Bank of America Merrill Lynch expects Treasury Wine Estates to more than double US earnings to $289 million in 2019, helping to power the company to a profit of $489m in the year, up from $218m last year.

In a report today, BAML analyst David Errington maintained his bullish outlook for Treasury (TWE) having executed a complete backflip on the company’s US outlook.

Two years ago, Errington demanded the company sell the US business claiming it was a drag on earnings.

The business accounts for 44 per cent of the company’s net sales revenue, against 27 per cent in Australia, and 36 per cent of earnings, against 24 per cent in Australia.

This follows last year’s $660m Diageo acquisition.

Errington based his about face on his confidence the company can match its restructuring efforts in Australia based on exiting unprofitable wineries, rebuilding priority brands, rebuilding relationships with distributors and finding new markets for US wine.

“We forecast EBIT in the US to increase 110 per cent from FY16 to FY19 (from $136m in FY16 to $289m in FY19). This increase is based on the work TWE has done in restructuring and resetting its US business in terms of culling non-priority (low-profit) products and integrating the recently acquired Diageo assets,” he said.

Errington said he expected “sales from TWE’s US wine business to grow strongly increasing from $991m in FY16 to $1,392m in FY19 (using constant currency assumptions).”

He noted “To date, overseas markets have been an untapped opportunity for US wines … probably because the growth in the US market has satisfied the majority of supply.

However, TWE is increasing its focus on opening new markets for its US global brand portfolio … with the aim of achieving the same benefits that its Australian portfolio of wines achieved when the same strategy was adopted in Australia. As the chart above shows, US exports to China are growing rapidly.”

US exports to China this year have grown from $2m in January to close to $14m in July.

The company’s stock was trading down slightly at $10.95 in lunchtime trade against Errington’s price objective of $12.75 a share.