COMMENT: Seagram loss still casts shadow over Allied
One analyst called Allied Domecq's results today "a tale of volume woe; pricing glee." The mixed reaction pretty much summed up the impressions of the city.
While Allied beat market expectations by posting a rise in half year profits of 6%, it did so on the back of a fall in volumes of 3%. The US was the key to this fall in volumes where price rises affected volumes in key brands such as Sauza and Beefeater.
CEO Philip Bowman said the company recognised it had short-term challenges. The US is, after all, the key market and volumes of four leading brands were poor. Ballantine's fell 1%, Sauza was down 5%, Kalhua registered a drop of 8%; and Beefeater volumes were flat.
The reaction from the industry analysts reflected these mixed results. Some believe Allied's stock is still trading at a discount compared to rivals Diageo and Pernod Ricard and the continued profit growth has attracted praise.
But the key concern remains how Allied is reacting to losing the battle to acquire the Seagram spirits portfolio. As Ian Shackleton of Credit Suisse First Boston said today: "There appears to be a performance gap between Allied and its rivals, Diageo and Pernod."
And despite reassuring the market that it was taking "action over the past few months to correct the situation" and that "key brands are showing a good recovery", both Pernod Ricard and Diageo registered volume increases in the US despite the difficult trading conditions in the US after September 11th.
Stuart Price, beverage analyst with WestLB Panmure said: "A strategic re-think [is] required soon. While Allied Domecq has said that H2 is trading in line with expectations, we believe that the management need a fundamental re-think if it is to re-rate the stock and close the valuation gap between it and Diageo."
He continued: "It has come to the ready-to-drink market too late and competition in this category is intensifying, [while] investing in wine brings high levels of capital intensity which lowers returns."
He concluded by recommending that Allied consider either securitising its ageing inventory and/or its fast food restaurants.
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