2023-09-04 04:26:02 ET
Summary
- Pernod Ricard's stock is fairly valued, but there is potential for outperformance if China and the US perform better than expected.
- The company reported strong organic sales growth in all three regions, with Asia and Europe showing significant growth.
- PRNDY should trade at a similar multiple to industry peers given the similar growth and margin expectations.
Summary
Pernod Ricard ( PRNDY ) produces and markets alcoholic beverages. The business has a wide portfolio of wines, whiskies, spirits, liquors, etc. I am recommending a hold rating as the stock seems to be fairly valued in the near term. That said, I would highlight the possibility of outperformance if China and the US perform better than expected in the next few quarters. If that happens, I think multiples might rerate higher, with driver upsides. However, given the current outlook, I would not be placing my bets on that happening until more information is disclosed or reported by management.
Financials / Valuation
PRNDY reported 19% organic sales growth in 4Q23 , with growth in all three regions contributing to this result. The Americas increased organic revenue by 2% in FY23, with growth picking up to 3% in the final quarter of FY23. Organic sales in Asia increased by 17% in FY23, with growth picking up speed in 4Q23 to 36%. The growth in Asia was largely driven by India, the rebounding travel retail sector, China, and Turkey. In particular, the Scotch portfolio, Jameson and Absolut, contributed heavily to India's 13% growth in FY23. The Chinese market was up 6%, with management citing 46% growth in 4Q23 thanks to a return to consumer spending and a more favorable comparison base. The company has raised prices again in May, and inventory levels in China are strong. Finally, Europe contributed 8% growth in FY23, with growth picking up to 14% in 4Q23. With the on-trade recovery now in full swing, the focus in Europe shifted to Spain, where the gin portfolio, Ballantine's, and Absolut all contributed significantly to double-digit growth.
Based on author's own math
Based on my view of the business, PRNDY is fairly valued. My model focuses on the near-term (FY24), as the macro situation forces investors to focus on quarterly performance. Using consensus FY24 estimates and the current forward PE of 19x, I see the stock as fairly valued in the near term. My reason for using 19x forward PE is based on PRNDY performance vs. peers such as Marie Brizard Wine & Spirits, Davide Campari-Milano, Remy Cointreau, Royal Unibrew, Diageo, Carlsberg, Anheuser-Busch InBev, and Heineken. All of these are large players that compete in the same industry. Peers are trading at a medium multiple of 19x forward PE and are expected to grow in the mid-single digits in the next fiscal year. PRNDY has a similar profile; hence, I think it should be trading in the same multiple range. That said, I think it is important to also point out that PRNDY used to trade at an average multiple of 21x in the past 5 years, so if PRNDY performs better than expected (China growth is not as weak and US growth accelerates faster than expected), multiples could rerate higher on outperformance.
Comments
For my update, I will be focusing on the US, China, and company reorganization, as the results are quite telling on how resilient the European region is.
Despite the fact that US shipments fell by 5% in 2H23, a 10-point difference from 1H23, as depletions ultimately grew by 2% in FY23, I am confident on the US recovering sales throughout FY24. Since shipments increased prior to price increases in October of last year, I believe that management's guidance for declining sales in 1Q FY24 in the US is based purely on tougher comps rather than any underlying consumer weakness. The October price increases have caused demand to shift upstream, which has been exacerbated by wholesalers stocking up before the busy 4CQ2023 season. However, I'd like to remind investors that the US market is still growing at 1% to 2% right now, and that the long-term expectation is for growth of 4% to 5%; furthermore, management anticipates growth will accelerate back to this mid-single-digit growth range within 18 months.
The underlying dynamics are positive. I mentioned consumer resilience for the U.S. We're not at the 4% to 5% underlying growth medium-term level as we are normalizing. We believe right now the market, from a consumer demand standpoint, is probably anywhere between 1% and 2%. And then the rate at which and the timing to get to the 4% to 5%, I would say, your guess is as good as mine, but it's not going to happen in years from now. It's a question of, is it 6 months, 12 months, or 18 months max? This is something we'll see. That being said, for the full year, we said we expected a positive full-year in the U.S. Source: 4Q23 earnings call
As we head east, 4Q23 saw a lot of success in China. PRNDY organic sales growth performance in China increased to 8% in 2H23, thanks to a strong rebound in the 4Q as consumer activity picked up again and a low comparison base. Management also highlighted the fact that PRNDY kept its value share in China and finished the year with a healthy inventory level, all while raising prices in May. However, management did note that the tough macro environment is having an impact on weaker on-trade performance, especially in bars and nightclubs. Since macro conditions are less favorable and competition is higher, I do not anticipate another stellar showing from China. It's worth reminding investor that last year's PRNDY had a sales year because of the Mid-Autumn Festival. The next one to two quarters are likely to see growth dip into negative territory, consistent with management guidance.
Finally, I believe the management's decision to restructure the business's organizational structure merits some consideration. The new structure, in my opinion, will be efficient. The changes involve a significant reduction in the number of business's middle layers, with the elimination of regional entities covering EMEA/LATAM and Asia. This should aid in making quicker decision making. In addition, with Maria Pia de Caro's addition to the executive committee, the revised organizational structure stands to improve PRNDY's supply chain's overall efficiency. She has worked in supply chain and operations for 25 years, gaining experience at P&G, Mondelez, and Unilever.
Risk & conclusion
As China is expected to slow down quite a bit in 1Q24, I have concerns that the situation might be worse than expected given the macro situation in China, where consumer confidence is at very low levels when compared across the past 25 years. Also, given the nature of products, there is no guarantee that the high growth seen in 4Q23 will continue if the world flips into a major recession as inflation rates continue to be a pain across various parts of the world.
Overall, I give PRNDY a hold rating. The company's recent performance, particularly in China and the US, has been positive, but concerns linger amidst the global economic climate. PRNDY appears fairly valued based on current metrics, with a forward PE in line with industry peers. However, there's potential for multiple expansion if China's growth surpasses expectations and the US market recovers as anticipated. The upcoming quarters will be pivotal, especially with China's expected slowdown and ongoing global economic uncertainties. PRNDY's restructuring efforts seem promising for operational efficiency. Still, the risks associated with a potential major economic downturn and the nature of its products should not be overlooked. As such, a hold rating is justified for now, but future decisions should hinge on the evolving macroeconomic landscape and PRNDY's ability to navigate it successfully.
For further details see:
Pernod Ricard: Hold Rating For Now As I Await U.S. And China Upcoming Performance Data