Wine demand has weakened in both the US and China, Treasury’s (ASX: TWE) key markets. The company is guiding to interim fiscal 2026 underlying EBIT of $225 million to $235 million, 41% lower than last year at the midpoint. It expects earnings in the second half to be higher.

Why it matters: We cut our fiscal 2026 underlying EBIT forecast by 34% to $497 million, about 35% lower than last year. We now think earnings in the US and China have rebased permanently lower, and reduce our longer-term earnings forecasts from fiscal 2028 by about 23% on average.

  • The US is the primary driver of the downgrade. Luxury wine demand is weak, particularly in California, and Treasury appears to have less pricing power than we previously expected. We reduce our price growth assumptions for the Americas and the associated margins it can maintain long term.
  • Our expectations for China have also been rebased lower. The impact on demand following tighter regulation of large-scale banqueting occasions is more pronounced than we expected, and appears here to stay. We forecast growth in the region, but from a lower base and not as quickly as previously.

The bottom line: We lower our fair value estimate for no-moat Treasury by 26% to $8.50 per share. Treasury shares screen materially undervalued. Granted, the next two years are set to be challenging with weak wine demand exacerbated by limiting shipments to reduce distributor inventories.

  • The current share price implies operating earnings persist lower than the last two years for at least a decade. We think this is unlikely, especially since much of the impact is temporary, including a transition to a new Californian distributor and lower distributor shipments.
  • We think weaker US demand is cyclical, and focusing on distributor inventory should protect Treasury’s brand equity and margins. China is still growing strongly, with depletions up 21% in the three months to October, and higher-end brands in the US are growing ahead of the market.

Treasury Wine Estates lacks sufficient brand equity to warrant an Economic Moat

Treasury Wine Estates is increasingly focusing on building high-end brands in its portfolio, particularly in luxury and premium wine. With this focus, the company’s revenue from higher-end wines has risen above 80% in fiscal 2025 from less than half in early 2014, both from growth in its higher-end products and purposeful reduction of low-end, or commercial, wine sales.

We expect continued end-market premiumization to benefit Treasury, leading to market share gains in Australasia and North America. In recent years, global wine consumption has proven sluggish, but high-priced wines have bucked this trend, with luxury volumes growing at mid- to high-single-digit rates in developed regions such as Australia and the US, per company estimates.

Treasury also faces risks from unfavorable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. That said, the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns. And bringing in a significant proportion of its grape and bulk wine from outside suppliers increases the proportion of variable costs and ensures a lower-cost supply in times of surplus.

But we don’t think Treasury’s volume share gains and positive mix shift support strong enough brand assets to offset industry fragmentation, a proliferation of branded offerings, limited customer switching costs, and potential for changing consumer tastes. As such, despite a strong position in Australia, the company will likely continue to combat competitive pricing and promotional activity globally.

Bulls say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high-margin business for Treasury given a focus on luxury and midrange wine.
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands.
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilization, improving margins, and higher ROICs.

Bears say

  • Treasury is constantly battling with industry oversupply as wine consumption volumes continue to decline annually.
  • Treasury should enjoy rising profitability, but operating margins will likely continue to trail those of industry leaders, evidence of the firm’s lack of durable cost advantage.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.