Treasury Wine Estates Ltd (ASX:TWE) is a wine company with its products being sold across the globe. It’s one of the few Australian large-caps that saw significant insider buying over the past three months — TWE insiders invested more than $161 million during the same time period. While insider buying doesn’t hold much significance from an investment perspective, it at least tells how the people, who know the company internally, feel about its future.
On the surface, analysts’ earnings growth projection of over 60% in three-years provides a similar outlook. But it doesn’t seem highly optimistic when we look deeper — TWE experienced strong double-digit top-line growth since 2014, while the company’s net income increased more than 230%. TWE has become impressively efficient with gross margins improving from 24.6% in FY’13 to 36.9% over the past year. That, along with product rationalization, reflected in its net profit margin growing from 2.7% to 10.0% during the same time period.
Apart from organic growth driven by a good response to its marketing efforts in China and the US, sales are expected to grow from the acquisition of US-based Diageo wine. In terms of cash synergies, TWE recently raised its target from US$25 million to US$35 million on an annual basis, while expecting $100 million savings in cost of goods sold, compared to $80 million earlier, by FY’20 as it grows in size. That’s a big number considering it made $257 million over the past year. Apart from gaining a significant presence in the US Luxury and Masstige wine segments through the acquisition, TWE recently forayed into manufacturing French wine for the quality-concerned customers in one of its key markets: China.
TWE shares are trading at all time highs, up nearly 200% in five years and 30% over the past year. In its most recent half yearly results, TWE delivered a year-over-year 20.2% revenue growth and a 47% jump in basic EPS, prompting an interim dividend payout of 13 cents per share (unfranked), compared to 8.0 cents a year ago. Its growing manufacturing capabilities, along with a range of established brands, can deliver high-single-digit growth in the medium term. This has been a double-treat for shareholders, gaining from both the share price rise and growing dividends, and it seems insiders expect this trend to continue.
Significant insider buying at Wesfarmers too
Owner of popular supermarket chain Coles, Wesfarmers (ASX:WES) is a conglomerate that’s also involved in gas processing, chemicals and fertilizer businesses. WES shares are up nearly 5% over the past year, but what’s equally important for investors is its dividend yield of 4.53%, which appears sustainable based on its cash generation, however, earnings at just 1.3x multiple of its interest costs raise some concerns, given that most likely growth channels going forward would be acquisitions.
Past three months saw nearly $200 million invested by the company insiders and they don’t appear to be making a mistake when we look at the company’s intrinsic value estimate of $48.79, compared to the $44-mark its shares trade around currently. Although, what has kept shares under pressure is growing competition in the supermarket space, which may limit growth potential and bring down the margins of its Coles brand that accounts for more than 50% of the company’s operating profits and has been the growth engine over the past several years.