Pernod Ricard impresses in H1

Pernod Ricard impresses in H1

Pernod Ricard's view on acquisitions is thawing on the back of a strong half-year, but there is evidence of some investors getting carried away. Here, just-drinks looks at the market reaction to the group's results.

Yesterday (16 February), Pernod Ricard raised its full-year guidance for organic operating profits growth to "close to 8%", indicating a better-than-expected first-half. Ever erring on the side of caution when it comes to guidance, presumably a straight "8%" would have appeared far too bullish.  

Perhaps the firm is right to be tentative. After all, there are signs that investors have been getting carried away with all this Cognac business in China. Pernod's share price slipped by around 3.5% yesterday, despite the group reporting an 8% lift in net sales for the six months to the end of December, to EUR4.6bn (US$6bn). 

Morningstar analyst Thomas Mullarkey said: "While Pernod Ricard continues to successfully execute its strategy, we feel that the shares are slightly overvalued at this time." The shares are still up by almost 5% since the start of 2012.

In general, analysts and media were full of praise for Pernod, which offset weak consumer demand in much of Western Europe with growth for Jameson in the US, Cognac in China and Scotch whisky just about everywhere else. Not that Europe is finished, as the group was at pains to highlight.    

Mullarkey highlighted Pernod's growing reliance on margin-boosting premium brands. "During the most recent half-year period, premium brands accounted for 74% of group sales versus 71% in the prior-year period," he said in a note. This percentage is likely to continue its "slow, but steady, climb", he added.

Sanford Bernstein said that Pernod's results "were better than Diageo at the top and bottom-line". Once again, Pernod's Martell brand in China lifted it above Diageo, boosted by the earlier timing of Chinese New Year. In Europe, meanwhile, Pernod's numbers were inflated by discounters in France stockpiling Ricard pastis ahead of a 14% increase in spirits excise tax.

This will turn from strength to weakness in the next quarter or two, but Bernstein said the firm's "underlying run-rate remains robust". Still, there is an assumption in Pernod's numbers that its profits growth rate will slow in the second-half. 

To boot, Bernstein cut its estimates on earnings per share for this year and next year by between 0.5% and 1%. "Slightly better than expected organic growth in H1 and a more positive exchange rate effect in H2 are offset by increased tax and interest [guidance]," the analyst group said.

Several media outlets took yesterday's results conference to probe for cracks in Pernod's stance on acquisitions. The group has been saying for a while now that debt is the focus and acquisitions are off the radar.

Yesterday proved to be more or less the same, with Pernod's CFO, Gilles Bogaert, telling Bloomberg that maintaining investment grade credit rating is still the priority. However, he did say that the firm is open to "tactical moves" for brands. Hardly a smoking gun on its intent to chase Beam Inc for the time being. That said, Pernod has always played its M&A cards close to its chest. 

For now, Pernod seems content to motor along. Underlying trends of growth in emerging markets, improvement in the US and sluggish demand in Europe look set to continue. A financial implosion in Europe is the obvious nightmare.