Investors send wine stocks fizzing

Winemaker takeovers and improved market conditions in the United States have fuelled investor interest in Australia's largest listed wine companies, pushing some stocks to record highs.

Brewer and wine maker Foster's Group and wine maker McGuigan Simeon Wines have touched all-time peaks.

Australia's largest wine maker, Southcorp, hit a 22-month high on Thursday as it recovers from a failed price discounting strategy in the UK.

Recent high-priced takeovers of US wine companies had fuelled momentum in the Australian companies, F. W. Holst & Co analyst David Spry said.

"Some institutions here may have felt they were a little underweight in some of these stocks, should something happen, and there has been a fair bit of rationalisation starting to happen, particularly in the Californian market," he said. "There has been just a bit of a rerating in the sector."

Buying gained momentum after Constellation Brands agreed to pay US$1.04 billion for Californian winemaker Robert Mondavi in November.

Last week, British drinks giant Diageo said it would pay US$260 million for Napa-based Californian wine company the Chalone Wine Group.

An oversupply of grapes in California, which has hit the US earnings of Southcorp and Foster's, was also starting to ease, said Shaw Stockbroking analyst Scott Marshall.

"That is really starting to wash out of the system now," he said, adding that the supply of super-cheap wine was drying up.

Southcorp, the maker of Penfolds, Rosemount and Lindemans wines, rallied about 11 per cent in its two previous trading sessions and extended the gains in early trade on Thursday before easing 1.6 per cent to A$4.20.

But analysts cautioned that conditions remained difficult in the competitive US market and that Southcorp was still in the middle of its earnings recovery programme.

"I am a little mystified about the current price. I would have thought it is a little bit overdone," Spry said.

Price-earnings ratios support Spry's caution. Southcorp is trading at 26.9 times forecast earnings, versus 17.4 for Constellation, 15.7 for Diageo and 13.3 for McGuigan Simeon.

Foster's this month sold its Lensworth property division for a higher-than-expected A$846 million ($917 million) and is expected to announce a share buy-back in February, after saying it would return most of the proceeds to shareholders.

It is also in the middle of an overhaul of its Beringer Blass wine division, which sells about two-thirds of its wine in the US.

Foster's shares, which last week reached a high of A$5.90, were down 6Ac yesterday at A$5.79. McGuigan Simeon Wines, which makes Black Swan wine for US-based E. & J. Gallo, climbed 3.7 per cent to a record of A$5.68 on Thursday. Southcorp rose 7Ac to A$4.29 yesterday after hitting a high of A$4.49.

- REUTERS