Spirits Sector Overview: A Persistent Hangover?
This research was written almost 2 weeks ago. For the updated and complete research, please contact us at sales@alphavalue.eu
Analysis
Although the COVID era was a golden age for spirits companies, the industry has somewhat sobered up since the beginning of the year with profit warnings from Remy Cointreau and Diageo, and Pernod Ricard and Campari missing expectations. Furthermore, the recent months have seen pressure on spirits stocks due to apprehension about GLP-1 treatments. Currently, our spirits coverage trades at 20.4x the 12m forward PE, or a 27.6% discount vs. the past decade. Additionally, Beverages share prices have underperformed the STOXX 600 by 24% YTD (chart below).
Source: AlphaValue Analysis, Bloomberg data
Source: AlphaValue Analysis, Bloomberg data
While we remain optimistic about the industry’s long-term prospects there are still too many downside risks that lead us to err on the side of caution about spirits in the short term, despite their compelling valuations.
Best spirit picks?
In our view it is still too early to dive into Spirits, but below we give an overview of the four beverage stocks. Full and updated analysis can be found by contacting us directly.
Diageo: BUY recommendation
The recent downward revision of the MT organic operating profit growth outlook, announced during the profit warning and confirmed in the CMD two weeks ago, doesn’t alter our long-term conviction on this blue chip company. Operating profit is now expected to grow by +5% to +7% (vs. +6% to +9% previously), roughly in line with the organic top-line growth. The revised outlook appears more effectively to reflect the prevailing macroeconomic challenges. As inflation falls and aligns with projected productivity savings of $2bn spanning from FY 2025 to FY 2027 (derived from COGS improvements, enhanced marketing efficiency and streamlined overheads), Diageo’s organic operating profit is expected to outpace revenue growth in the long run. However, the company has refrained from committing to a specific timeline.
The profit warning impacting Diageo’s outlook has carried significant weight: despite being the No.1 worldwide – with its best-in-class mix, geographical diversification and strong portfolio – Diageo is not immune to the industry challenges. Despite the management’s reassurance, uncertainties persist regarding consumer circumstances and the lack of visibility surrounding inventories held by retailers and wholesalers across the LatAm region. Consequently, we eagerly await the H1 results for further insights.
Source: AlphaValue Analysis, Bloomberg data
Pernod Ricard: BUY recommendation
While the company has confirmed its FY 2024 outlook in the US (around +2% yoy, with the help of low comps for H2) and provided encouraging news from China, its share price has underperformed the STOXX 600 by -10% since its Q1 results on 19/10/2023 (while outperforming our spirits coverage by +4.8%). The primary reasons behind this are the subdued conditions in the US and the hesitant recovery observed in China. Additionally, the modest performance in India can be attributed, for the most part, to the suspension of the company’s license in New Delhi. While there is no new information on the situation, the license was suspended in Q1 last year, therefore the remainder of FY 2024 will not be impacted.
While Pernod Ricard is less premium than Diageo, the read-across from Diageo’s profit warning could result in similar weaknesses for the French group. Although none of this was disclosed during the H1 results one month ago, it’s possible that the bad news might come out during the Q2.
Source: AlphaValue Analysis, Bloomberg data
Remy Cointreau: ADD recommendation
Following two exceptional years (+74% cumulative organic growth between FY 2022 and FY 2023), Remy Cointreau is amongst the spirits companies to have struggled most YTD (having underperformed by -15% and -36% our spirits coverage and the STOXX 600 index respectively). The company has been hit hard by the reversal to pre Covid. The market didn’t react well to i) its initial announcement of flat organic sales growth for FY 2024 and, ii) later in the year, when it issued a profit warning and slashed its 2024 outlook from flat organic sales growth to -15% to -20%. After experiencing a significant drop in sales, Remy has disclosed a €100m cost-cutting program aimed at safeguarding its profitability. Despite facing challenging times, Remy’s commendable level of transparency and information dissemination deserves recognition.
With approximately 27% of the group’s total revenue generated in China, the recent uptick in some sales is an encouraging sign although the recovery remains insufficiently robust.
Source: AlphaValue Analysis, Bloomberg data
Davide Campari-Milano: ADD recommendation
Despite a disappointing Q3, largely attributed to adverse weather conditions in Europe, consumer pressure in the region and a number of one-off events, Campari has shown greater resilience within the prevailing context. This is primarily attributed to its distinctive profile and its emphasis on liqueurs/aperitifs. These beverages, frequently enjoyed in cocktails, are preferred by a younger urban demographic seeking to sustain their lifestyle, which appears to have been less affected by the economic circumstances.
Nevertheless, the company’s limited exposure to APAC restrains its ability to capitalize on the robust fundamentals of India and on the anticipated full recovery in China. Additionally, the ongoing conditions in China have further delayed the launch of Aperol on the Chinese market. This launch had already been postponed due to COVID-19 and the subsequent lockdowns.
Source: AlphaValue Analysis, Bloomberg data
For the full and updated research with the recommendations, potential catalysts and our analyst’s take, please reach out to sales@alphavalue.eu
Although the COVID era was a golden age for spirits companies, the industry has somewhat sobered up since the beginning of the year with profit warnings from Remy Cointreau and Diageo, and Pernod Ricard and Campari missing expectations. Furthermore, the recent months have seen pressure on spirits stocks due to apprehension about GLP-1 treatments. Currently, our spirits coverage trades at 20.4x the 12m forward PE, or a 27.6% discount vs. the past decade. Additionally, Beverages share prices have underperformed the STOXX 600 by 24% YTD (chart below).
Source: AlphaValue Analysis, Bloomberg data
Source: AlphaValue Analysis, Bloomberg data
While we remain optimistic about the industry’s long-term prospects there are still too many downside risks that lead us to err on the side of caution about spirits in the short term, despite their compelling valuations.
Best spirit picks?
In our view it is still too early to dive into Spirits, but below we give an overview of the four beverage stocks. Full and updated analysis can be found by contacting us directly.
Diageo: BUY recommendation
The recent downward revision of the MT organic operating profit growth outlook, announced during the profit warning and confirmed in the CMD two weeks ago, doesn’t alter our long-term conviction on this blue chip company. Operating profit is now expected to grow by +5% to +7% (vs. +6% to +9% previously), roughly in line with the organic top-line growth. The revised outlook appears more effectively to reflect the prevailing macroeconomic challenges. As inflation falls and aligns with projected productivity savings of $2bn spanning from FY 2025 to FY 2027 (derived from COGS improvements, enhanced marketing efficiency and streamlined overheads), Diageo’s organic operating profit is expected to outpace revenue growth in the long run. However, the company has refrained from committing to a specific timeline.
The profit warning impacting Diageo’s outlook has carried significant weight: despite being the No.1 worldwide – with its best-in-class mix, geographical diversification and strong portfolio – Diageo is not immune to the industry challenges. Despite the management’s reassurance, uncertainties persist regarding consumer circumstances and the lack of visibility surrounding inventories held by retailers and wholesalers across the LatAm region. Consequently, we eagerly await the H1 results for further insights.
Source: AlphaValue Analysis, Bloomberg data
Pernod Ricard: BUY recommendation
While the company has confirmed its FY 2024 outlook in the US (around +2% yoy, with the help of low comps for H2) and provided encouraging news from China, its share price has underperformed the STOXX 600 by -10% since its Q1 results on 19/10/2023 (while outperforming our spirits coverage by +4.8%). The primary reasons behind this are the subdued conditions in the US and the hesitant recovery observed in China. Additionally, the modest performance in India can be attributed, for the most part, to the suspension of the company’s license in New Delhi. While there is no new information on the situation, the license was suspended in Q1 last year, therefore the remainder of FY 2024 will not be impacted.
While Pernod Ricard is less premium than Diageo, the read-across from Diageo’s profit warning could result in similar weaknesses for the French group. Although none of this was disclosed during the H1 results one month ago, it’s possible that the bad news might come out during the Q2.
Source: AlphaValue Analysis, Bloomberg data
Remy Cointreau: ADD recommendation
Following two exceptional years (+74% cumulative organic growth between FY 2022 and FY 2023), Remy Cointreau is amongst the spirits companies to have struggled most YTD (having underperformed by -15% and -36% our spirits coverage and the STOXX 600 index respectively). The company has been hit hard by the reversal to pre Covid. The market didn’t react well to i) its initial announcement of flat organic sales growth for FY 2024 and, ii) later in the year, when it issued a profit warning and slashed its 2024 outlook from flat organic sales growth to -15% to -20%. After experiencing a significant drop in sales, Remy has disclosed a €100m cost-cutting program aimed at safeguarding its profitability. Despite facing challenging times, Remy’s commendable level of transparency and information dissemination deserves recognition.
With approximately 27% of the group’s total revenue generated in China, the recent uptick in some sales is an encouraging sign although the recovery remains insufficiently robust.
Source: AlphaValue Analysis, Bloomberg data
Davide Campari-Milano: ADD recommendation
Despite a disappointing Q3, largely attributed to adverse weather conditions in Europe, consumer pressure in the region and a number of one-off events, Campari has shown greater resilience within the prevailing context. This is primarily attributed to its distinctive profile and its emphasis on liqueurs/aperitifs. These beverages, frequently enjoyed in cocktails, are preferred by a younger urban demographic seeking to sustain their lifestyle, which appears to have been less affected by the economic circumstances.
Nevertheless, the company’s limited exposure to APAC restrains its ability to capitalize on the robust fundamentals of India and on the anticipated full recovery in China. Additionally, the ongoing conditions in China have further delayed the launch of Aperol on the Chinese market. This launch had already been postponed due to COVID-19 and the subsequent lockdowns.
Source: AlphaValue Analysis, Bloomberg data
For the full and updated research with the recommendations, potential catalysts and our analyst’s take, please reach out to sales@alphavalue.eu
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