Fosters Group Limited (ASX:FGL) is a blue-chip ASX-listed Australian beverage company with a wide range of brands covering beer, wine, spirits and ciders. Over the last few years the company has faced a number of challenges and is now in the process of trying to improve it’s underlying business and deliver better value for shareholders.
The nature of Fosters business means that when times are tough it’s earning should in theory, hold up fairly well since people still tend to drink beer, wine etc. This makes FGL shares a classic defensive play during economic downturns, but it then should become more of a growth stock when times are goods as people can afford to consume their premium brands and sales volumes also increase.
In addition Foster’s is active in promoting it’s brands in Asia and there should be plenty of room to increase earnings in this region especially from its wine brands. Having said that, every wine producer on the planet is trying to tap into the markets across Asia so the competition is fierce.
However Fosters’ wine business has been in recent years it’s Achilles heal and in May 2010 the company wrote down the value of it’s wine assets by $1.3 billion. Ouch!
Much of this pain has been caused by a global over supply of wine. This was caused by too much extra wine production coming online globally in order to supply the apparently insatiable demand of the Asian middle class. As a result of this over supply wine prices fell and this caused a lot of pain for the Fosters wine business and wine business globally as well. (hence the flood of cheap wine into the market)
Three years ago Foster’s launched a “back to basics” programme to get the company back on track, but it’s probably too early to say if this effort has been a success to date. Therefore investing in FGL shares is perhaps a little more risky now than it was in its pre-wine business days.
Fosters Group Limited (ASX:FGL) 5 year stock price chart.
As we see from the above stock price chart, the Fosters share price was on the way down well before the global financial crisis hit and this was due in a large part to the drag it’s wine business was having on the overall company.
Foster’s acquired it’s wine business from Southcorp in 2005 and picked up brands like Penfolds, Lindemans and Rosemount as part of the deal. Unfortunately for Fosters, this strategic acquisition has been causing the company grief for years and as part of it’s turn around strategy plans are afoot to spin off the wine business sometime in 2011.
Over the last few years FGL shares have held up fairly well, but it’s hard to see much of an uplift in the stock price as a result of the “back to basics” programme.
If we look the technical chart below of the FGL share price then we can see that although the stock has provided some good short term trading opportunities, it has at the same time been a bit of a disappointment for long term stock market investors.
Fosters Group Limited (ASX:FGL) 3 years candlestick chart.
I guess it would be possible to draw some trends lines on the chart above but personally I do not any clear trend. In around February 2008 the stock price was around $5.75 and now in February 2011 it’s at around the same level. This is hardly anything to get excited about.
As of the 30th June 2010 Fosters had a ROE (Return on Equity) of 26.5% and this figure has been improving over the last 5 years so that certainly is a step in the right direction. However sales growth has been fairly flat over the same period and at a P/E ration of 15, it’s not exactly the sort of stock that at the moment looks that attractive to me.
Also if the Australian economy does run into some headwinds this year or in 2012 then I would expect that the FGL share price will come under pressure. In addition I think the glory days of the Australian wine industry might be behind it and even though Foster’s owns wineries in the US, the real growth in wine sales will come from Asia. In that market place fierce competition will keep prices very tight.
There is a significant premium wine market well in Asia which might provide Fosters a lucrative market opportunity, but I am not sure the Fosters wines business is going to be able to compete well against the European brands in this market space and fend off competition from the other “new world” wine countries such as Chile, Canada and Mexico at the same time.
If the board and management of Fosters can work some magic then the stock is possibly worth looking at this year, but at the moment I personally would rather have my money in a cash term deposit bank account.
Please remember that these “Stockwatch” articles are not a recommendation to buy, hold or sell any stock or investment. I urge all investors to do plenty of their own research and seek professional investment advice as required.
Disclosure: The author of this article, Greg Atkinson, does not own shares in Fosters Group Limited. (FGL)