Treasury Wine Estates Ltd (ASX: TWE) shares have been through a difficult period, and investors have plenty of reasons to be cautious.
However, with the shares trading at around $6.44 at the time of writing, I think an opportunity may be emerging.
And if I had $5,000 to invest, this is one ASX share I'd be taking a closer look at. Here's why.
What's gone wrong at Treasury Wine?
Treasury Wine is behind some of Australia's best-known wine brands, including Penfolds, Wolf Blass, and Wynns.
However, the company has faced considerable challenges in two of its most important markets.
In China, weaker demand for luxury wines and problems with parallel imports have disrupted sales. Meanwhile, the collapse of a major US distributor, combined with difficult conditions in the American wine market, has put significant pressure on its operations.
The impact has been severe. In FY26, Treasury Wine's underlying operating earnings fell 36% to $492 million, while the company recorded substantial asset impairments.
Management also suspended dividends to preserve cash and reduce debt.
I can understand why investors lost confidence. But I think there's a reasonable case for believing the worst could be behind the business.
Why I'm optimistic about a recovery
One reason is that Treasury Wine still owns some excellent brands, especially Penfolds.
Despite the company's recent difficulties, demand for Penfolds has been encouraging in several markets.
For example, its latest trading update revealed that sales from distributors to customers in China were tracking slightly ahead of expectations.
That's encouraging because Treasury Wine has deliberately restricted shipments into China to reduce excess inventory and protect its premium pricing.
As those inventories return to more normal levels, I believe stronger customer demand should begin translating into improved sales and profitability.
And there are opportunities to improve its American operations. Management is reducing wine production, reviewing its assets, and making changes to its distribution arrangements.
I think these initiatives could eventually create a more efficient and profitable business.
Treasury Wine is also targeting $100 million in annual cost savings by FY29, with approximately $40 million expected in FY27. If it can deliver those savings while rebuilding sales, I believe earnings could recover strongly over the next few years.
Could Treasury Wine shares be cheap?
I think its shares could be cheap based on its medium-term outlook.
According to CommSec consensus forecasts, Treasury Wine is expected to generate earnings per share of 35.2 cents in FY27.
At $6.44, the shares trade at a forward price-to-earnings (PE) ratio of approximately 18.3 times. That's not an obvious bargain for a business facing significant challenges.
However, analysts expect earnings to recover to 43.4 cents per share in FY28 and 44.3 cents in FY29. Those forecasts put the shares at earnings multiples of approximately 14.8 and 14.5, respectively.
I think that could prove cheap if management successfully restores profitability and rebuilds investor confidence.
There's also the prospect of dividends returning. CommSec consensus forecasts suggest payments could resume in FY28 at 13 cents per share, before increasing to 24.5 cents in FY29. The latter would represent a 3.8% dividend yield.
Of course, these forecasts depend on the turnaround succeeding. Treasury Wine still needs to reduce debt, improve its American operations, and navigate changing consumer drinking habits.
Management is targeting leverage below two times by the end of FY28, so I'll be watching its progress closely.
Foolish takeaway
I think Treasury Wine could be a turnaround opportunity at today's share price.
Its problems won't disappear overnight, but I believe the strength of its brands and opportunities to improve profitability give it a reasonable chance of recovering.
For investors comfortable with some uncertainty, I'd consider buying shares around $6.44 and holding for the long term.
The post $5,000 to invest? Treasury Wine shares could be dirt cheap appeared first on The Motley Fool Australia.
Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Treasury Wine Estates. The Motley Fool Australia has positions in and has recommended Treasury Wine Estates. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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