Pernod Ricard--new position

 PERNOD RICARD

Recently I have bought a position in PER, this note is a defence of that action!

PER is not a world leader in spirits although it is quite large, perhaps number 2 behind Diageo.

Both these companies hold the premium spirits brands in the world, and both have very long histories of running profitable businesses. Both are very unloved at the current time.

The markets lack of interest appears to stem from a few avenues. Firstly, that GLP-1 will dent demand for alcohol and given the concentration in drinker volumes, that is, a relatively few drink a lot, there is the risk that volumes will stagnate.

Secondly. C19 brought about volatile demand patterns that are still normalising, making normal demand patterns a bit hard to identify. A part of this it appears that the liquor companies have taken price rises over this period so maybe a time of flat or modest price rises are upon us.  

The business model has for many years been one of little or no volume growth but price growth as well as positive mix effects as customers drink less but better. The lack of volume growth complicates the thesis.

The market has largely priced in these risks with historic PE 16X, well below the 5y historic average of 26X and below thee one standard deviation of 19X. I am assuming 5% cagr eps growth against a 75 historic. These numbers show that it is a low grower. The balance sheet is full at 2.9X, imo, but eh company does produce cash. The expected return is 9% cagr with an assumed exit PE of 19X. 143e. the stability ratio is surprisingly low 47%, even adjusting for C19 gets it up to mid 60% still not great predictability of earnings.

Why PER when DGE has better valuation? Subjective calls here. DGE is much mor exposed to NA than PER. Therefore more exposed to potential GLP-1 impacts and also NA has very high margins. PER has a family shareholder which adds some capital allocation protection as well as its greater experience in EM with China and India being the largest opportunities for global growth. DGE has also has some recent management changes and maybe question marks.

Writing this you can see that PER is unlikely to be a huge winner more a steady gainer. Modest allocation.

 Please note the disclaimer.

 future notes

positioning in zero alcohol, RTD, tequila versus DGE, do a DGE comparison in detail

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