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Spirits In COVID-19: Updates On Diageo, Pernod Ricard, Rémy Cointreau And Brown-Forman

Jun. 01, 2020 1:37 PM ETDiageo plc (DEO), PDRDF, PRNDY, REMYF, REMYY, DGEAFBF.A, BF.B21 Comments
Librarian Capital profile picture
Librarian Capital
8.13K Followers

Summary

  • We review recent datapoints on spirits companies, to assess the impact of COVID-19 so far, ahead of trading updates starting next week.
  • Latest Pernod Ricard and Rémy Cointreau guidance imply declines of 50% or more in operating profits in CY20H1, and Diageo will likely be similar.
  • Diageo and Pernod each has an approx. 2.5% Dividend Yield, but keeping this may depend on management attitude on leverage and investment.
  • Relative to unimpacted CY19 financials, Diageo and Pernod are both on approx. 20x P/E and 4% Free Cash Flow Yield; Rémy is on 35x and 2%.
  • We still believe in our long-term thesis on premiumisation and rising affluence driving spirits growth, but expect more near-term volatility.

Introduction

We initiated our Buy ratings on Diageo (NYSE:DEO) and Pernod Ricard (OTCPK:PDRDY) in July and August respectively, and on Rémy Cointreau (OTCPK:REMYY) in December:

While the three companies have distinct characteristics, their investment cases are based on the same common themes of premiumisation, rising affluence and strong incumbent advantages in the spirits sector.

Unfortunately, these stocks have done poorly so far. Since our initial Buy ratings, Diageo has lost 16.8%, Pernod Ricard (referred here as "PR") has lost 12.6% and Rémy Cointreau ("RCO") has lost 7.3% (inclusive of dividends and in local currencies), with the bulk of the losses appearing after COVID-19. By contrast, Brown-Forman (BF.B) investors ("BF") (no rating) have seen shares rise 29%:

Spirits Companies’ Share Prices (Last 12 Months)

NB. Share price performances in local currencies. Source: Yahoo Finance (29-May-20).

In this article we review the latest datapoints on each company, to assess the impact of COVID-19 so far, ahead of trading updates starting next week.

Rémy Cointreau

Overview: 90% of RCO's EBIT comes from its House of Rémy Martin cognac business. This has APAC as its most important region, with 44% of FY19 sales, followed by Americas (42%) and EMEA (14%). The smaller Liqueurs & Spirits business more is weighted towards EMEA but is still sizeable in Americas:

RCO Net Sales & EBIT Breakdown (FY19A)

NB. Figures are pre IFRS 16, 15 and 9. Source: RCO results presentation (FY19H2).

Within APAC, a significant portion of sales come from Hong Kong and Travel Retail there, so much so that disruption in Hong Kong during FY20H1 (April to September 2019) was enough to drag APAC growth down to 2.9%, from 29.0% the year before.

This article was written by

Librarian Capital profile picture
8.13K Followers
We are no longer publishing new content on Seeking Alpha. To get in touch, use the website or Twitter account on our profile, as comments and messages on this site are no longer checked regularly. Articles published under our name on Seeking Alpha were personal opinions, based on information believed to be correct at the time of writing, but not updated. Librarian Capital is an independent third party that published articles on Seeking Alpha on an ad hoc basis, and we have had no contractual relationship with Seeking Alpha beyond the terms and conditions under which those articles were published.

Analyst’s Disclosure: I am/we are long DEO, PDRDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (21)

TechStock Hunter profile picture
I know nothing about this industry... but I'd like to make a contribution regarding brand power. Living in East Asia, I have seen first-hand the "magic" power of brand. Local folk are willing to pay up for Black Label over Red Label -they know the difference. I am talking about regular folk here, not the super-rich 1%. Looking to build a position in DEO one day should the P/E enter "cheap" territory...
Librarian Capital profile picture
Thanks, @TechStock Hunter - interesting feedback.
Action Biased profile picture
Thanks for the comparison! I looked at Campari and I think it's a sell:
seekingalpha.com/...
S
Thank you for the article, a couple of clarifications/questions. Could you explain the statement about on trade being "higher margin"? If I am not correct, at the point of sale @ on trade, the producer has already made his profit as he sells to distributors, not to the trade ( part of the legal structure in the USA in fact ) . Also, I think that any analysis that does not discuss the underlying brands owned by each company leaves out important data points - you cannot compare Diageo to BF, their stables of brands do not compare - some brands will potentially do better in the times ahead, and that needs to be considered. Regardless, I agree that the sector is worth investing in for the long term. Long DEO.
Librarian Capital profile picture
@Soho1

Thank you. My statement about "on" trade is a general observation per $ spend, based on management comments, and also includes the impact of factors such as mix of the spirits consumed.

While you may be correct that, for the same bottle, the producer may in fact make a lower margin with "on" trade, consumers tend to go for more premium and thus higher-margin offerings when in restaurants/bars vs. being at home. In addition, outside the US (which is a minority of sales for everyone, even Brown-Forman), supermarkets and other "off" outlets have bigger bargaining power and tend to get lower prices; the same is also true for e-commerce players like Alibaba in China.

While I agree that the companies are different (with "distinct characteristics" as stated in the article), I can and do make comparisons between Diageo and Brown-Forman, etc. - so far as investors are concerned, a dollar of earning is a dollar of earnings.
S
Many of your comments above actually make little or no sense in the context of the spirits industry. It is not the same as CPG, but that is okay, it's part of the game on places like SA, authors can look at the numbers a company produces and read the earnings call commentary, but intrinsic knowledge of the industry really helps to understand the underlying business model and help to predict performance. For instance, "consumers tend to go for more premium and thus higher-margin offerings when in restaurants/bars vs. being at home". I am not sure that is correct, in many bars, Titos and Grey Goose are on the menu @ similar prices, or at least NOT @ prices that match the price variance in the off trade - bars are leveraging the fact that Titos is popular and make a better margin off it, but Titos is not premium. Also, consider when you have good stable of products, depth, with say both premium and value brands, when people stop drinking Grey Goose because of price and trade down, do you own the next brand they buy or does that sale go to a competitor. Note that the threat to established brands in the supermarkets is own brands products.... Costco Vodka, whatever it is. Anyhow, you provide an analysis of the industry, by the numbers and the players and frankly putting your $$$ on any of them is a good bet.
Librarian Capital profile picture
@Soho1

Thank you for sharing your thoughts.

I do not believe "own brands" products to be a serious threat to established brands, except at the low end.

You seem to be basing your opinions on your personal experiences in the US; I am basing mine on company reports and previous conversations with company executives as a professional investor.

I note that some of your comments on other articles refer to you being "in the industry" and to "my company", but gives no other details. In addition, not all company executives have proved good investors in their own industries. Moreover, I also note that you made comments about industries other than spirits with a similarly self-confident, patronising tone.

Life is too short. If you don't like what I write - and I don't like what you write - let's just stay away from each other.
t
Thank you for the update @Librarian Capital
What would be your buy price for BF.B?
O
I prefer BF.A. shares are currently providing a good discount.
t
@OldMillennial Actually I do too. The author wrote about BF.B, so I thought I'd ask about that. Right now my cost basis for BF.A are when I recently bought it in the mid 40s. I'm wondering if I should loosen up and buy it in the low 50s as well.
O
haha i had the same exact thoughts recently. i recent purchased some shares in the mid 40s and was wondering if i should add again in the low 50s as well.

Personally i view BF.A as a company that you should be able to pass down the shares to your kids. they are such a well run org.
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