Australia: After years of stagnation, shares of Australian drinks company Foster's Group Ltd. have perked up in the past few months as investors bet on a profit revival for its underperforming wine unit, Dow Jones posted on December 6. In recent weeks, interest in Foster's has stirred further, pushing the stock toward record territory, on talk that the company will return bumper proceeds from the looming sale of its Lensworth property unit to shareholders.
While Foster's is still considering options on the capital management front, analysts predict the beer and wine company may direct up to A$1.3 billion in spare cash to an off-market share buyback and/or special dividend.
Shares in Foster's are on a roll, ending up 2.4% at A$5.47 Friday, extending gains in the last three months to 15%. That's double the increase achieved by Australia's S&P/ASX 200 index over the same period. Last Monday, Foster's touched A$5.54, its highest level in three years.
Supported by an existing on-market share buyback and a buoyant local bourse, some analysts believe the stock may edge toward A$6.00 in the near term on the possibility of more good news flow. "Outside of some form of disaster...we think the stock's got more momentum," says David Roberton, an analyst at UBS, which recently lifted its price target on Foster's to A$5.60 from A$4.95.
Roberton predicts Foster's may undertake a capital return of between A$1 billion and A$1.3 billion via a combination of an off-market buyback and special dividend. Prospects of a tax-friendly dividend payout and an earnings-enhancing buyback, along with expectations of a U.S. wine recovery, have enticed many other analysts to also upgrade their price targets for the stock in recent months.
Of nine analysts surveyed who follow Foster's, price targets range from A$4.90 to A$6.00. Despite recent share price gains, three still have buy ratings on the stock, with the remaining six on hold or neutral.
Among the most bullish is Credit Suisse First Boston analyst Larry Gandler, who recently raised his 12-month price target to A$6.00 from A$4.90 on rising confidence that U.S. wine earnings are on the road to recovery.
Gandler wrote in a recent report about the prospect of Foster's being re-rated by the market if it refinances debt and shows signs of earnings certainty under chief executive Trevor O'Hoy, who started in the job in April.
Like other winemakers, Melbourne-based Foster's has been struggling to keep profit margins intact over the past few years because of a global grape glut and price discounting.
Foster's wine unit, which represents a third of overall earnings and sells brands such as Beringer, Wolf Blass and Yellowglen, posted a 33% drop in earnings in the fiscal year ended June 30, 2004, while its U.S. wine business reported a 46% slump in earnings in the year.
However, industry participants including Foster's O'Hoy have increasingly talked up an imminent recovery in the crucial U.S. market, pointing to a lower 2004 California grape harvest, rising bulk wine prices and a reduction in distributor inventories.
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