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magazineHigh-quality drinks pick Pernod Ricard sells at a tasty discount to peers
Investors who’ve been richly rewarded by backing alcoholic drinks maker Diageo (DGE) should buy another large cap consumer defensive with tasty long-run growth prospects, namely its smaller spirits rival Pernod Ricard (RI:EPA).
Shares in the French drinks group are trading on a prospective price earnings ratio of 20.6 for the year to June 2023, falling to 18.9 for 2024 based on estimates from Berenberg, a not-to-be-missed discount relative to the firm’s own history, EU consumer staples and close peer Diageo.
This is an attractive point of entry into a high quality, prodigiously cash generative company whose competitive advantages include a portfolio of prestigious brands and one of the best routes to market of any global spirits business.
We share Bank of America analyst Andrea Pistacchi’s view that Pernod Ricard offers exposure to ‘resilient earnings in the current environment, with its geographic diversification and portfolio which should be relatively protected from potential trading down’.
PRESTIGIOUS PORTFOLIO
For the uninitiated, Pernod Ricard is the world’s number two wines and spirits producer and owns 17 of the top 100 spirits brands, yet like Diageo, still has significant scope for growth in a fragmented global drinks market.
The firm’s drinks portfolio, covering all drinks occasions and price points and distributed across more than 160 markets, spans everything from Absolut Vodka and Ricard pastis, to Chivas Regal and The Glenlivet Scotch whiskies.
Other brands Pernod Ricard sells include Jameson Irish whiskey, Martell cognac, Havana Club rum, Beefeater gin and Perrier- Jouët champagne. Euronext-listed and part of the CAC 40 and Eurostoxx 50 indices, Pernod Ricard, company strapline ‘Créateurs de Convivialité’, is stewarded by its thoughtful chairman and CEO Alexandre Ricard – the Ricard family has a 14.27% stake.
He has skewed the portfolio to the high-growth super-premium segment and insists ‘there has definitely been a newfound appreciation for conviviality since the Covid outbreak’.
RIGHT PLACE, RIGHT TIME
Pernod Ricard is exposed to favourable consumer trends, with spirits taking a greater share in total beverage alcohol and the drinks market undergoing ‘premiumisation’, a trend which sees consumers drinking less but spending more on premium tipples.
One of the most exciting aspects of the story is that Pernod Ricard offers a play on a global legal drinking age population set to grow at a compound annual growth rate of 1.3% between 2020 and 2025, largely driven by emerging affluent middle classes in China
and India.
The business is also embracing technology to ensure it remains relevant in the future, relying on its ‘Conviviality Platform’, a new growth model based on data and artificial intelligence, to meet the ever-changing demands of consumers.
STIRRING UP GROWTH
The £42.9 billion cap served up (1 September) forecast-beating results for the year to June 2022, with sales bubbling up 17% organically to a record €10.7 billion as Pernod Ricard distilled double-digit growth across all key regions, namely the Americas, Asia-Rest of World and Europe. The company delivered market share gains in most markets and flexed its pricing power muscles to achieve price increases across all markets, of ‘mid single digit on average’ according to Pernod Ricard.
While Pernod Ricard’s finished the year with a 2.4 times leverage ratio, mainly the result of spending related to earlier acquisitions and last year’s €750 million share buyback, 2022 was a year of record high cash generation. In a show of confidence in its future prospects and cash generation, Pernod increased the dividend by 32% to €4.12 per share and announced a new €500 million to €750 million share buyback for the new financial year.
Berenberg, which has a €235 price target implying 22% upside, forecasts pre-tax profits growth from €2.8 billion to €3.2 billion this year, ahead of almost €3.5 billion in fiscal 2024. The broker likes Pernod Ricard’s exposure to super-premium spirits and its track record of self-help margin expansion and notes the company has one of the largest exposures to the recovery in global travel retail as international travel recovers.
Crucially, Berenberg also believes that Pernod Ricard is in the early stages of an earnings upgrade cycle, ‘driven by management’s greater focus on operating leverage’.
Bumper gross margins above 60% suggest Pernod Ricard can cope with current inflation in input costs. In fact, Ricard and his team intend to deliver gross and operating margin expansion in the current financial year through a cocktail of cost efficiencies, further price increases and a positive sales mix, hopefully helped by a recovery in China and travel retail volumes in Asia.
Among the risks to consider are the potential for Pernod Ricard to overpay for acquisitions or significant increases in alcohol excise duties in lucrative markets such as the US, France, China, Spain and India, which could negatively affect the spirits producer’s tasty profit growth trajectory.
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