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Treasury Wine Estates (TWE)
Treasury wine estates (ASX: TWE) is one of the world's largest wine companies. In their aspiration to be the world's most admired wine company, their winemaking and brand marketing are centred around sustainable growth and meeting the evolving interests of their customers. They strive to be known for the unique experiences they create for their customers, suppliers, and partners. Currently, TWE has reached over 70 countries, have 11,300 hectares of vineyards and wine-making facilities and consists of 2,500 dedicated team members, which they claim to be "the heart and soul of the business" (Treasury Wine Estates, 2010) TWE competes in the highly competitive distillers and vintners’ market and operates in the food, beverage, and tobacco industry. Thanks to Australia's ideal winemaking climate, TWE is competing against many big businesses, with some of the biggest competitors including Australian Vintage Ltd (ASX: AVG), Constellation Brands Inc (ASX: STZ) and Pernod Ricard (ASX: RI) (Treasury Wine Estates - Overview, News & Competitors, 2023).
TWE has remained committed to its core qualities, focusing on sustainable shareholder return. Despite facing ongoing pandemic-related restrictions that have affected its global operations, TWE has proven resilience, with its sales and E-commerce channels operating above pre-pandemic levels. Notably, earnings per share increased by 4.1% at the end of the 2022 financial year, and the business
has a projected growth rate of 4.93%. These positive indicators make TWE a low-risk and attractive investment opportunity (TWE Annual Report, 2022
).
Dividend Discount Model Valuation
Equity Cost Of Capital
The capital asset pricing model (CAPM) was utilized to determine the aggregate equity cost of capital, which provides investors with a means of assessing the potential risks and rewards associated with investing in particular stock. To obtain the CAPM, a risk-free rate of 3.85%, a market portfolio returns of 8.5%, and TWE’s beta 5Y of 0.44 was used (Capital IQ, 2023). The resulting CAPM
value was 5.98%. The CAPM model used can be seen below.
CAPM
=
E
[
R
]
=
R
f
+
β ×
(
E
[
R
mkt
]
−
R
f
)
E
[
R
]
=
5.98%
Given that the discount rate derived from the CAPM model is higher than the risk-free rate of 3.85% and lower than the market portfolio return rate of 8.5%, it is suggested that although there is certainly some risk involved with investment, there is potential to earn a return rate higher than the risk-free rate. Moreover, with a discount rate of 5.98%, when compared to other companies in the market, TWE investments are somewhat risk associated but relatively safer.
Growth Rate Estimation
A growth rate estimation was conducted using net income to determine the potential short-term growth rate of TWE. Financial variables such as EBIT and revenue were ignored as EBIT includes tax and interest, and revenue is too easily affected by outside variables, hence would not determine a reasonable estimated growth rate regarding the dividend discount model. To gain a broad perspective of the firm's movement across different periods, six years were analyzed between 2017-
2022.
To estimate the potential growth rates, the percent in which net income increased each year was found. The arithmetic mean was found by averaging these values whilst the geometric mean was determined as seen below.
geometric mean
=
[
(
1
+
G
1
) (
1
+
G
2
)
…
(
1
+
G
n
)
]
1
/
n
−
1
¿
4.93%
The geometric mean of 4.93% was the most reasonable estimate of short-term growth for TWE. The geometric mean was used rather than arithmetic, as the geometric mean considers compounding, and investors believe it to be a more representative measure of return compared to the arithmetic mean. Many qualitative factors may affect the accuracy of the estimated growth rate. Despite the pervasive impact of the pandemic on various industries and businesses, the food, beverage, and tobacco industry – TWE included – exhibited remarkable resilience, maintaining a solid growth rate throughout the pandemic period. However, the 2018 growth rate suggests the pandemic may have constrained its growth potential. TWE's growth rate increased drastically in 2022, suggesting that, for long-term investors, earnings growth is likely to reach pre-pandemic rates (2018) in 8-10 years. In
the interim, TWE stock presents a compelling investment opportunity with growth potential and a dividend yield of 2.27% (Capital IQ, 2023).
TWE growth rate using net income
year 2017
2018
2019
2020
2021
2022
net income 269.1
408.5
245.4
250
263.2
342.3
Growth rate of net income
-
51.80%
-39.93%
1.87%
5.28%
30.05%
1 + g
100%
151.80%
60.07%
101.87%
105.28%
130.05%
Arithmetic Mean
9.82%
Geometric Mean
4.93%
The industry growth rates were determined using net income to analyse further TWE’s growth rate and position within the market. The geometric mean for the industry growth rate was 2.98%, while the compounded annual growth rate over the last 3 years for the sub-industry is 9.4% (Capital IQ, 2023). Compared to the industry growth rate, TWE is operating above the industry average for food, beverage, and tobacco, suggesting that it is expanding faster than its rivals in the industry. Moreover, TWE’s compounded annual growth rate over the last 3 years (11.73%), exceeds the sub-
industry growth rate. TWE is performing well, indicating TWE’s ability to outperform other competitors in this industry niche. Overall, TWE is well-positioned within the industry, and is an attractive investment for investors. Industry growth rate using net income
year 2017
2018
2019
2020
2021
2022
net income 50.60
52.10
43.60
50.00
55.10
58.60
Growth rate of net income
-
2.96%
-16.31%
14.68%
10.20%
6.35%
1 + g
100%
102.96%
83.69%
114.68%
110.20%
106.35%
Arithmetic Mean
3.58%
Geometric Mean
2.98%
DDM Valuation
A DDM valuation was carried out to calculate an estimated intrinsic value of Treasury Wine Estates (TWE), over ten years, from 2017 to 2027. The growth rate from dividends per share from 2017 to 2022 was calculated using exact data. Future expected dividends (2023 to 2027) were determined using the 10.71%, derived from the growth rate calculated between 2021 and 2022 DPS (Capital IQ, 2023). Example 2023 equation seen below.
Estimated DPS
=
Previous year DPS X
(
1
+
estimated growth rate
)
¿
0.31
X
(
1
+
10.71%
)
¿
0.38
Applying this growth rate across the five years allowed for determining the stock's current value each year, which produced an intrinsic value of 2.08. Example calculations seen below.
Determining stocks current value 2025:
Current value
=
DPS
/(
(
discount rate
+
1
)
n
)
¿
0.42
/(
(
5.98%
+
1
)
4
)
¿
0.33
Intrinsic value:
Intrinsic value
=
DPS
(
discount rate
+
1
)
1
+
DPS
(
discount rate
+
1
)
2
+
…
DPS
(
discount rate
+
1
)
n
Intrinsic value
=
0.31
(
5.98%
+
1
)
1
+
0.34
(
5.98%
+
1
)
2
+
…
0.52
(
5.98%
+
1
)
6
¿
2.08
TWE's current share price of 13.68 suggests that the stock is overvalued by 84% in the market, and it is suggested that investors refrain from purchasing TWE stocks.
DDM
Future expected Dividends
year 2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
DPS
0.26
0.32
0.38
0.28
0.28
0.31
0.34
0.38
0.42
0.47
0.52
Growth rate -
23.08%
18.75%
-
26.32%
0.00%
10.71%
10.71
%
10.71
%
10.71
%
10.71
%
10.71%
1 + g
100
%
123.08
%
118.75
%
73.68%
100.00
%
110.71
%
Current value
0.29
0.31
0.32
0.33
0.47
0.36
Terminal
value 51.51
Value Multiples
P/BV
The price-to-book (P/BV) ratio is a key valuation metric often used to assess the investment potential
of a company’s stock by comparing its market price per share with its book value per share. Generally, a P/BV below 1 indicates undervalued stock, meaning it trades for less than the value of its assets, whereas a P/BV above three is seen as overvalued (Bromels. J, 2020). In the case of Treasury Wines Estates, its average P/BV value is 2.47 (Capital IQ, 2023), indicating the current market price of TWE’s stock is 2.47 times the book value of the company’s assets and that TWE’s stock is currently trading at a premium. When compared to its biggest competitors, such as STZ and RI, TWE’s P/BV is lower, suggesting that its stock is not nearly as overvalued as two of its largest competitors. However, when compared to AVG, TWE’s P/BV suggests that it is far from the most undervalued stock in the market, and there are
competitors which would provide a larger margin
of safety for investors.
Arithmetic mean 2.475
5.98%
Arithmetic mean 7.98%
Intrinsic value
2.08
Current price 13.68
difference
84.79%
P/BV values compared amongst competitors
Business
Average P/BV
value between
2022 - 2025
Treasury wine estate (TWE)
2.475
Constellation Brand Inc (STZ)
4.0725
Australian Vintage Ltd (AVG)
0.4
Pernod Ricard (RI)
3.25
Year
2022
2023
2024
2025
closing share price 13.68
13.68
13.68
13.68
book value per shar
5.24
5.43
5.63
5.85
P/BV Value
2.61
2.52
2.43
2.34
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- Technology advancements have fueled the global economy and impacted the ways in which businesses design their supply chains One cup of Starbucks coffee is comprised of materials from various countries and represents numerous supplier relationships In the age of the global village, designing supply chains is similar to conducting a massive orchestra’ achieving harmony requires strategy, planning, and impeccable execution Think about an organization’s supply chain with which you are familiar or have worked with in the past in order to discuss the following: 1 Describe the organization’s supply chain List the key components and include the key stakeholders, vendors, technologies, and if applicable, modes of transportation that are involved 2 How might you redesign the company’s supply chain for maximum effectiveness and harmony? Outline the key inputs and outputs of your supply chain and distinguish the suppliers that merit partnership status Justify their status…arrow_forwardMoving to Green Computing Your organization is a leader in the development of renewable energy sources based on enhanced geothermal systems and is viewed as a champion in the fight to reduce carbon emissions. The organization employs over 25,000 people worldwide and operates three global data centers, one each in the United States, Europe, and Southeast Asia. The CEO has asked all her C level executives for input on a proposed strategy to become a leader in green computing. Critical Thinking Questions Identify two additional tactics the organization might take to accelerate its move toward green computing? Identify the pros and cons or any issues associated with your proposed tactics.arrow_forward1 Jennifer Baskiter is president and CEO of Plants&More.com, an Internet company that sells plants and flowers. The success of her startup Internet company has motivated her to expand and create two divisions. One division focuses on sales to the general public and the other focuses on business-to-business sales to hotels, restaurants, and other firms that want plants and flowers for their businesses. She is considering using return on investment as a means of evaluating her divisions and their managers. She has hired you as a compensation consultant. What issues or concerns would you raise regarding the use of ROI for evaluating the divisions and their managers? (You may select Askarrow_forward
- Since 2005, Modco has a full range of groceries and general merchandise sold through 8,000 retail units and several banners in 15 countries. According to the company’s CEO, Modcos annual report reflects the social and environmental dimensions of its activities and its constant and progressive work toward social responsibility issues. Modco’s 2017 annual report states how its emphasis on sustainability has helped the company to be the retail leader in the market. According to the report, Modco has investment in education, health, commitments to fight hunger, support for local farmers, and access to healthier and affordable food. Students will assume they are a part of research team examining the sustainability reporting and stakeholder relations.arrow_forwardSince 2005, Modco has a full range of groceries and general merchandise sold through 8,000 retail units and several banners in 15 countries. According to the company’s CEO, Modco's annual report reflects its activities' social and environmental dimensions and its constant and progressive work toward social responsibility issues. Modco’s 2017 annual report states how its emphasis on sustainability has helped the company to be the retail leader in the market. According to the report, Modco invests in education, health, commitments to fight hunger, support for local farmers, and access to healthier and affordable food. Students will assume they are a part of a research team examining sustainability reporting and stakeholder relations.arrow_forwardAccounting at MacCloud Winery Mike MacCloud had worked in the operations side of a winery for several years. Having built a strong knowledge of the art of making wine, he had decided to create his own wine label (i.e., brand). For his label, he planned to grow all of his own grapes. He had identified an ideal plot of five acres of land in northern California that had most recently been used to grow soybeans. His initial plans were to lease a nearby building to use as a winery (i.e., a place for processing grapes and fermenting and aging his wine). However, Mike hoped someday to build his own winery and thus would only plant on four acres of land. Mike agreed to lease the building for 10 years at $5,000 per year. It was estimated that the building was worth $32,000 and had a 30-year economic life. The lease contract Mike signed did not mention any bargain purchase option or that Mike might assume ownership of the leased building. The interest rate Mike received on his personal bank…arrow_forward
- Quick Stop operates 1,000 convenience stores throughout the United States. The company’s slogan is “Best Stop of the Day,” and its mission is to make every customer a return customer. Quick Stop’s corporate strategy supports this mission by stressing the importance of sparkling clean surroundings, well-stocked shelves, and, above all, cheerful employees. Of course, improved shareholder value drives this strategy. Q. Assume that Quick Stop uses a balanced scorecard approach to formulating its management control system. List three measures that Quick Stop might use to evaluate each of the four balanced scorecard perspectives: financial perspective, customer perspective, internal-business- process perspective, and learning-and-growth perspective.arrow_forwardThere are 3 companies given operating in different fields. You have to choose and substantiate possible models for international expansion of the businesses. Let us suggest, the companies are scaling their business up or exporting their goods or services. The companies are: 1. Local European leading cosmetics manufacturer at medium scale products price range. Not Bio or Eco specialized. Annual turnover is 10 million euros. Local market penetration and brand recognition is 90%. MRA 2. Local market research consulting company having a patented statistical method for analysis and segmentation of consumers. CVT 3. Local Higher School of Management having highly qualified academic staff, but missing the positive image inside the country. Define expansion’s: strategy, geography, format, pricing, volumes, budgets.arrow_forwardA) explain the following questions after reading the passage about MAERSK. A.P. Moller - Maersk is an integrated transport & logistics company with multiple brands and is a global leader in container shipping and ports. Including a stand-alone Energy division, the company employs roughly 80.000 employees across operations in 130 countries. In addition to owning one of the world’s largest shipping companies, Maersk is involved in a wide range of activities in the shipping, logistics, and the oil and gas industries. So The Maersk Group operates within global trade, shipping and energy industries and provides innovative marketing solutions that will help not only its companies advance, but the overall industries as well.Transport & Logistics consists of Maersk Line, APM Terminals, Damco, Svitzer and MaerskContainer Industry. The mission of these businesses is to enable and facilitate global supply chains and provide opportunities for our customers to trade globally. Soren Skou,…arrow_forward
- Austin BBQ has seen rapid growth in the last five years. It started with one store and is now located in 15 different locations across five cities. The CEO has noticed that costs are increasing and so is beginning to standardize practices across the various locations. Which of the following perspectives is most consistent with the CEO's efforts? Group of answer choices 1.Rational System 2.Natural System 3.Open System 4.Operational Systemarrow_forwardStarDucks, Inc (SDUX) is an American coffee company with more than 10,000 coffeehouses operating in the United States. Unlike many of its major competitors, it remained focused only on the production and sale of coffee drinks so far, rather than diversifying into other similar food and beverage lines. Recently, to respond to increasing demands from its customer regarding new products, and to boost the company’s growth, the executive staff has been seriously thinking about entering into a different business line “SDUX Gelato” to realize new growth opportunities. An initial forecasting effort has been done to project the initial investment and subsequent cash flows for the next 5 years: Year 012345 Cash Flow ($000s) -1,750,000 -150,000 420,000 550,000 200,000 125,000 After the initial 5 years, SDUX believes the market will continue in perpetuity: however, given that the segment will reach maturity, it would very likely be a zero growth business. The company uses NPV for capital budgeting…arrow_forwardBenetton supply chain: One of the best known examples of how an organization can use its supply chain to achieve a competitive advantage is the Benetton Group. Founded by the Benetton family in the 1960s, the company is now one of the largest garment retailers, with stores which bear its name located in almost all parts of the world. Part of the reason for its success has been the way it has organized both the supply side and the demand side of its supply chain. Although Benetton does manufacture much of its production itself, on its supply side the company relies heavily on ‘contractors’. Contractors are companies (many of which are owned, or part-owned, by Benetton employees) that provide services to the Benetton factories by knitting and assembling Benetton’s garments. These contractors, in turn, use the services of sub-contractors to perform some of the manufacturing tasks. Benetton’s manufacturing operations gain two advantages from this. First, its production costs for woollen…arrow_forward
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