Pernod Ricard a hot tip for 2011 - analysts

Pernod Ricard a hot tip for 2011 - analysts

Pernod Ricard's increased advertising spend is set to pay dividends in 2011, but will debt shackle the French group to the sidelines when it comes to M&A?

Pernod Ricard is being tipped by several analysts for a hot year. China continues to guzzle expensive Cognac, while Americans are returning to Absolut in between gulps of Jameson whiskey. We've even seen a 3% increase in first quarter net sales of Ricard in France, despite the death - literally, in some cases - of the pastis' mainstay market of old men in southern French towns.

"We believe Pernod Ricard is well set to outperform the market," said analyst group Sanford Bernstein, adding that it forecasts 7% net sales growth in the group's first-half. "In contrast to Diageo, Pernod Ricard advertising and promotion (A&P) spend is now back to pre-crisis levels."

Since the arrival of 2011, analysts at Evolution Securities and ING Bank have raised their recommendations on Pernod stock to 'buy'. Nomura, too, has reaffirmed its 'buy' rating on the French firm. "We believe organic sales growth at Pernod Ricard is returning to its long-run 6% average more quickly than the market anticipates," said Evolution this week.

Last year, Pernod took the rare step ahead of its annual general meeting of publishing profits guidance, a move which has been taken as a sign of confidence in a management team known for its understatement. "Pernod has a history of under-promising and then over-delivering," said Evolution. "Given the strengthening sales and mix trends noted above, and the favourable FX tailwinds, we believe management guidance for organic EBIT growth of "close to 6%" for the year to [end of] June 2011 is too low."

The elephant in Pernod's boardroom, however, is debt. Lest we forget, the group saddled itself with a mini-debt mountain by agreeing to snap up Absolut vodka owner Vin & Sprit for EUR5.6bn (US$7.5bn) in 2008. Years of deleveraging have followed, including the sale around EUR1bn-worth of non-core brands, amid accusations that the firm overpaid for what boils down to one vodka brand - albeit a big one.

Evolution argued that the debt issue "should not overly trouble investors" and that cashflow will reduce debt levels in the current fiscal year. The Wall Street Journal reported that "spirits at Pernod Ricard are much higher than they were a year ago" and that shareholders were "sanguine" about the company's debt.

The big question, however, is whether Pernod's ongoing travails with debt will preclude it from taking part in industry consolidation. All eyes are on Fortune Brands, in particular, which plans this year to separate its Beam Global Spirits & Wine division from its other businesses. It is a move likely to open up Beam Global to offers, especially considering its attractive portfolio of Jim Beam, Sauza Tequila, Maker's Mark, Courvoisier and Laphroaig.

Sanford Bernstein does not expect Pernod to be a frontrunner for Beam brands, if they become available this year. "Although we believe Pernod Ricard would love to acquire a few brands from Beam Global (in particular Sauza Tequila and Maker's Mark Bourbon), we believe that, due to their current high leverage (est at approx 5x EBITDA), they are unlikely to be in a strong primary buyer position vs players like Diageo and/or Bacardi," said Bernstein.

"In addition, we think that an acquisition of this scale will likely trigger the need for a larger refinancing, which we view as not in Pernod Ricard's best interest," it added.

However, in an interview with the Financial Times last week, Pernod's CEO, Pierre Pringuet, appeared to suggest that the door is not closed. He reiterated that Pernod will not seek acquisitions "until we have obtained investment grade rating", but some observers believe that could be achieved in the near future.   

Pringuet said that one of Pernod's "challenges" is to increase its footprint in the US. The country accounts for around half of the global spirits profit pool. 

Pernod's performance in the first half of calendar 2011 could yet set the group up as the dark horse in an M&A race, depending upon when the starting gun is fired. The firm will be hoping, however, that that will be later rather than sooner.