Humans have consumed alcohol for over 9.000 years, making it unlikely that this trend will disappear anytime soon. Pernod Ricard is one of the largest companies in the industry, with a comprehensive portfolio of brands, some centuries old and proven to stand the test of time. But is Pernod Ricard a good investment? That’s what I’ll explore in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Pernod Ricard. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. Thus, I have no personal stake in Pernod Ricard. If you want to purchase shares (or fractional shares) of Pernod Ricard, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Pernod Ricard is a global producer and distributor of spirits, created by the merger of Pernod and Ricard in 1975. The company offers a wide range of products, including whiskey, vodka, gin, rum, liqueur, champagne, tequila, mezcal, and aperitifs. With over 240 brands sold in more than 160 countries, it boasts one of the most comprehensive portfolios in the spirits industry. Some of its best-known brands include Pernod, Ricard, Absolut Vodka, Jameson Irish Whiskey, Chivas Regal, Martell Cognac, Malibu, Beefeater Gin, The Glenlivet, Kahlua, and Havana Club. Pernod Ricard has balanced regional exposure, with 29% of revenue from the Americas, 28% from Europe, and 43% from Asia/Rest of the World in fiscal year 2024. The company focuses on brand building, aiming to increase the power and equity of its brands, many of which have centuries-old legacies, while others are relatively new but equally popular. With 18 of the top 100 spirits brands worldwide, Pernod Ricard's extensive portfolio, each with its own history and character, is what gives the company its competitive moat, offering consumers unique experiences and brand loyalty across the globe.
Management
Alexandre Ricard is the CEO of Pernod Ricard, having joined the group in 2003 and held various leadership roles before becoming CEO and chairman of the board in 2015. Before joining Pernod Ricard, he worked at Accenture and Morgan Stanley. Alexandre is a graduate of ESCP, the Wharton School of Business (MBA in finance and entrepreneurship), and the University of Pennsylvania (MA in International Studies). He is also the grandson of Paul Ricard, the founder of Société Ricard. Alexandre Ricard has been preparing for this role for many years, from his early days visiting stores with his grandfather to gaining experience in investment banking and consulting. He is known for embodying his grandfather’s values of hard work and loyalty, and for his deep connection to the company. Described as calm, reserved, and internationally minded, Ricard is fluent in several languages and is mindful of the responsibility placed on him by the Ricard family. Given his extensive experience and passion for Pernod Ricard, I believe Alexandre Ricard is well-suited to lead the company forward.
The Numbers
The first metric to investigate is return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. Pernod Ricard has underperformed in this area, as ROIC hasn't surpassed 10% in any of the past ten years. Although ROIC improved in fiscal years 2022 and 2023, it declined again in the following year, impacted by macroeconomic headwinds. One factor affecting ROIC is the company's high debt, which we’ll address later in the analysis. When considering return on equity (ROE) instead of ROIC, Pernod Ricard shows better results. While ROIC isn't the only metric to consider, these numbers are underwhelming, and I would like to see a higher ROIC moving forward before considering investing in Pernod Ricard.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. Pernod Ricard has increased its equity every year except for fiscal year 2020, which was impacted by the pandemic. It is encouraging that the company delivered its highest equity ever in fiscal year 2024, and hopefully, this trend will continue.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It's not surprising that Pernod Ricard has delivered positive free cash flow every year over the past decade. However, fiscal year 2024 saw the lowest free cash flow since the pandemic, and excluding 2020, it was the lowest since 2015, which is concerning. The levered free cash flow margin is also at its lowest point in the past decade. One reason for this decline is increased investments aimed at supporting future growth, including capacity expansion in fiscal year 2024, with plans to continue in fiscal years 2025 and 2026. As a result, free cash flow is expected to remain lower in the coming years. While I prefer high free cash flow, I hope Pernod Ricard will improve once these expansions are completed. The free cash flow yield is below the ten-year average, suggesting the shares may not be trading at an attractive valuation, but this is something we'll revisit later in the analysis.
Debt
Another important factor to consider is debt. It's crucial to assess whether a business can repay its debt within three years, calculated by dividing total long-term debt by earnings. Pernod Ricard has 7,58 years of earnings in debt, which is significantly higher than I'd prefer and a cause for concern. Management has indicated that debt is expected to become more expensive in fiscal year 2025, but they also plan to reduce it, which is encouraging. Nonetheless, debt will need to be closely monitored if investing in Pernod Ricard.
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Risks
Based on my findings, I believe Pernod Ricard is an intriguing company. However, no investment is without risk, and Pernod Ricard faces its share of challenges. One key risk is competition. Distributor concentration and consolidation increase the bargaining power of retailers, limiting Pernod Ricard's ability to raise prices. The rise of e-commerce adds complexity to traditional distribution networks, potentially forcing more aggressive promotional campaigns to maintain market presence. Pernod Ricard also faces competition from large international players and smaller local producers, especially in markets where craft products are gaining popularity. This could lead to increased advertising costs and price reductions, eroding margins and potentially damaging brand positioning. In summary, the competitive landscape poses risks of margin erosion, loss of market share, and challenges to Pernod Ricard’s traditional premium positioning.
Macroeconomic factors pose a significant risk for Pernod Ricard due to its international presence and exposure to geopolitical tensions and economic instability. Events like the U.S.-China-EU trade war or sanctions related to the war in Ukraine highlight risks such as increased tariffs or export restrictions, which could disrupt market access and global trade. These measures have already impacted sales in key markets like Russia and Ukraine, which previously accounted for around 3% of the Group’s sales. Additionally, high inflation could shift consumer behavior, as declining purchasing power may lead to reduced spending on premium alcoholic beverages, directly affecting Pernod Ricard’s sales. The combination of economic crises, trade tensions, and inflation could heighten financial volatility and pressure operating margins.
Emerging headwinds pose a substantial risk for Pernod Ricard, as key industry trends challenge its traditional business model. The rise of GLP-1 drugs, initially developed for diabetes and weight loss, could reduce alcohol cravings, leading to a decline in consumption. Additionally, increasing cannabis use, especially among younger generations like Gen Z, presents a competing alternative to alcohol. Gen Z, in particular, is twice as likely to use cannabis and is drinking less alcohol overall. Moreover, Gen Z's preference for health-conscious lifestyles and sober or low-alcohol options is reshaping the market. This generation is driving demand for non-alcoholic and functional beverages that offer relaxation without the downsides of alcohol. These cultural shifts could erode the customer base for traditional alcoholic products, pressuring Pernod Ricard to innovate and diversify to stay competitive. These trends represent a fundamental risk to the future growth of traditional alcoholic beverage companies.
Reasons to invest
Premiumization is a compelling reason to invest in Pernod Ricard, as it aligns with the company’s strategy and capitalizes on growing consumer demand for higher-quality products. The global premium spirits market is projected to grow at a 10.3% CAGR until 2027, reflecting an increasing preference for premium and luxury offerings. This trend provides a strong foundation for Pernod Ricard's sustained growth, as consumers are willing to pay more for high-quality, exclusive products. Pernod Ricard’s focus on premiumization is evident in its recent portfolio management, divesting brands like Jacob’s Creek and Orlando to prioritize its premium spirits and champagne portfolio, where it sees the greatest growth potential. The company is also active in innovation, launching limited-edition products like LilletxEmily in Paris and Absolut Warhol, which enhance brand desirability and reinforce its premium positioning.
Emerging markets, particularly India and China, are key growth drivers for Pernod Ricard and present a strong investment case. India, now the company's second-largest market by net sales, benefits from robust GDP growth and an expanding middle class, fueling demand for premium products. With 25 million people reaching legal drinking age annually and being the world’s largest whiskey market, India is poised for continued growth. Pernod Ricard has seen 8% annual growth in India over the past five years, in line with its strategy of high single- to low double-digit growth. China presents a mixed short-term outlook due to weak consumer sentiment and macroeconomic challenges, but Pernod Ricard has gained market share and strengthened brand equity. While short-term performance is impacted, China remains a critical long-term market with growth projected in the high single digits.
The ready-to-drink (RTD) category is a significant growth driver for Pernod Ricard. Following the pandemic's exponential growth in RTDs, the company made this category a strategic priority by creating a dedicated RTD business unit. Since then, Pernod Ricard has doubled its RTD sales and continues to see strong growth. RTDs attract new consumers, with 68% of RTD drinkers previously consuming beer or wine, making RTD sales incremental rather than cannibalizing existing spirits sales. Co-branded collaborations, like Absolut's partnerships with Ocean Spray and Sprite, offer trusted brands in convenient formats, further driving demand. RTDs are now the second-largest alcohol category in the U.S. and are projected to account for 20% of spirits market growth by 2027. Pernod Ricard's focus on RTDs positions it well to capitalize on this trend, expanding its market reach and ensuring its brands are available across diverse markets.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 5,83, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 13,6% in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on Pernod Ricard's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €127,19. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Pernod Ricard at a price of €63,59 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.727, and capital expenditures were 773. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 541 in our calculations. The tax provision was 766. We have 250 outstanding shares. Hence, the calculation will be as follows: (1.727 – 541 + 766) / 250 x 10 = €78,08 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Pernod Ricard's Free Cash Flow Per Share at €3,82 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is €55,07.
Conclusion
I believe Pernod Ricard is an intriguing company with strong management. However, the company has consistently delivered a low ROIC, and free cash flow has declined due to increased capital expenditures. A key concern is its high debt, which also contributes to the underwhelming ROIC. Competition is a risk for Pernod Ricard, with distributor consolidation limiting pricing power, the rise of e-commerce requiring more aggressive promotions, and growing competition from global brands and local craft producers threatening margins and market share. Macroeconomic factors also pose a risk due to geopolitical tensions, trade restrictions, and inflation, which can disrupt sales and profitability. Declining consumer purchasing power could further impact demand for premium products. Emerging headwinds such as the rise of GLP-1 drugs, increasing cannabis use, and Gen Z's shift toward health-conscious, low-alcohol lifestyles also threaten alcohol consumption. On the positive side, Pernod Ricard benefits from growing consumer demand for premium spirits, with the global premium spirits market expected to grow at a 10,3% CAGR until 2027. The company’s focus on premiumization, along with strong growth potential in emerging markets like India and China, positions it well for the future. Additionally, the RTD category has become a key growth driver, with Pernod Ricard doubling its RTD sales and attracting new consumers. However, the combination of low ROIC and high debt makes me hesitant to invest in Pernod Ricard at this time.
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