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The tariff war squib, Pernod Ricard's activist success and the latest round of drinks companies' results - The just-drinks Analyst

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just-drinks' in-house analyst, Ian Shackleton, casts his eye this month over the escalating - or not - tariff row and its effect on spirits brand owners. Ian also has some warm words for Pernod Ricard and makes some cautiously upbeat sounds about the current results reporting season.

Does Pernod Ricard CEO Alex Ricard deserve applause yet?

Does Pernod Ricard CEO Alex Ricard deserve applause yet?

Tariff wars - a sigh of relief…for now

The spirits industry breathed a sigh of relief earlier this month - and share prices of quoted companies moved up - after the relative non-event of tariff increases by the US on imports from the European Union, in retaliation for illegal subsidies to Airbus, the European aerospace company.

There had been talk of 50%-to-100%-type taxes across the board. At the end of the day, there is a proposed 25% tariff on a selected group of products. Poor old Jose Cuervo might feel hard done by, then, as its Bushmills brand (from Northern Ireland) was singled out, whereas Pernod's larger Irish whiskey portfolio escaped scot-free. Single malts in Scotch took a hit, but this was relatively painless for Diageo, as it under-indexes in the category, despite its strong position in blended Scotch. And, you might wonder if Donald Trump has a particular soft spot for Cognac and Champagne, as these escaped without a hit.

He clearly doesn't like Parmesan cheese, though.

I saw one analyst describe the move as "a light touch". However, this may not be the end of the story. After all, American whiskey took a hit last year from higher EU tariffs (also at the 25% level), and this has certainly been painful for Brown-Forman given its large exposure, mainly thanks to Jack Daniel's.

The risk from a trade war is greater for those companies that are reliant on an export model, where brands are manufactured in one location and shipped around the world. To give you some idea of exposure, although around 45% of Diageo's business is in the US, I estimate that only 10% of that is imported Scotch, with most of the group's other brands produced locally. For Pernod, where the US accounts for only 25%, I estimate at least 75% of this is imported. And, for Remy Cointreau, where the US is also about 25% of its business, virtually all of this relates to imported Cognac or brand Cointreau, both of which are made in France.

While share prices for both Diageo and Pernod Ricard are still pretty high, a further escalation in global trade wars could present a significant hurdle for future performance.

Is Pernod Ricard quietly seeing off the activist?

Elliott Advisors, probably the most active activist in the market, is rarely out of the news. The company has recently taken a position in Saga, the UK company that specialises in providing for the over-50s, as well as in the US telecoms giant AT&T.

The market appears to have forgotten that it is only ten months ago that Elliott announced a stake in Pernod. I wrote at the time that "a good financial performance, which should lead to a higher share price, is the best way to ensure that the activist makes their money and departs looking for other targets".

It looks to me that CEO Alex Ricard and his team are doing a pretty good job at delivering just that. The share price is up nearly 20% since the stake was announced, despite a small pullback after last week's results (see below). The company has continued to deliver on top-line growth, as well as becoming more aggressive at looking at cost. At the start of this month, Pernod announced a major restructuring move in France, amalgamating the separate Pernod and Ricard salesforces, a move they had historically ruled out.

This sends a very strong message to investors that there are no sacred cows.

I have sometimes wondered whether having an activist onboard allowed Alex to pursue his agenda as CEO slightly faster than he had first envisaged. And, there could still be more to come.

There has been some talk about an exit from wine, which has not occurred yet. Certainly, the attractions of combining distribution of wines and spirits are not as strong as they once were, but I suspect it is a buyer's market in wine, as most of the large spirits companies have been exiting. At the end of the day, wine probably only accounts for around 5% of group profits, so I'm not sure that it would really move the dial for the share price.

So, what happens next? If the share price were to get towards EUR175-EUR180, Elliott might then be able to bank a 30%+ profit - not bad for a year or so's work – and move on to their next target.

And, we could all lift a glass and say: "Felicitations, Alex."

Q3 - steady as she goes…so far

The third-quarter consumer reporting season really kicked off last week, with the big three food companies (Nestle, Unilever and Danone), together with Pernod, Remy and The Coca-Cola Co all reporting.

I did mention last month that there had been a surprisingly positive mood to the large consumer conference in September held by Barclays. Since then, we've had a few tidbits that provide a bit more colour, none of which was negative. Diageo confirmed analyst estimates for the year at its AGM; PepsiCo (which always reports early) had a beat in its Q3 and effectively raised its sales guidance for the full year.

The canapes were good, then, but what about the main course?

In simple terms, Unilever, Nestle and Remy were 'meets', ie they met analyst estimates; Pernod and Danone were small 'misses', but they were both reporting revenues and did not change guidance; The Coca-Cola Co was a small 'beat' at the revenue level.

There was certainly some commentary around an uncertain business environment from several companies, but few issues that really got the alarm bells ringing. Some share prices did retrace - Pernod has moved back to the EUR160 level, but the group has had a strong run this year since Elliott took its stake. I suspect a few investors took the view this was not a bad time to take a bit of profit.

Looking forward, the macro outlook does look uncertain, whether it be global trade wars or Brexit, and I think the market might be quite unforgiving if there are 'misses', whereas 'beats' might be a relative non-event.

Put another way, for share prices there could be some long snakes, but some pretty short ladders.


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