Morgan Stanley predicts "golden period" for TWE

Treasury Wine Estate shares surged 6% yesterday to $11.10 following Morgan Stanley reporting that investors are underestimating growth - particularly in China - for the company.

Morgan Stanley upgraded TWE stock to "buy" with a price target of $13.

Analyst Thomas Kierath noted: "Results from our AlphaWise China alcoholic beverage survey of 1072 wine drinkers lead us to conclude that the recent surge in Australian wine sold to China isn’t a one-off event that will fade, but rather just the start of a golden period. Chinese consumers have told us they are switching from beer/baijiu (a Chinese alcoholic beverage made from grain) consumption to wine as they develop more western tastes and feel that wine is healthier than the alternatives. Australian wine is recognised by Chinese consumers as a desirable premium product that has great taste and is value for money. The largest impediment to purchasing more Australian wine, according to Chinese consumers, is availability, a problem that we think can be easily fixed and an area that TWE has already made strong progress in."

The reduction of import tariffs, which fell from 8.4% in 2016 to 5.6% in 2017 and then will reduce to 0% in 2019, thanks to the free-trade agreement signed between China and Australia is also anticipated to have an upside for TWE profits.

Motley Fool concluded: "Treasury is in a much better position now than it was a couple of years ago and analysts are still pointing to strong earnings per share growth in excess of 20% for the coming financial year. Investors could do much worse than investigating this company further as its exposure to growing Chinese consumption and the strong UK and US wine markets appears a good position for it."

It also sounded a note of caution: "Something to consider though is how competition from the likes of Australian Vintage Limited (ASX: AVG) may impact the company. Treasury’s iconic Australian brands will remain popular but the more ‘niche’ products developed by smaller producers may become the wine of choice, with higher margins/price points, in the future.

"Another concern is Treasury’s spotted history when it comes to expanding – history can repeat itself and is often the reason why investors get sucked into rotten stocks."