Pernod Ricard’s stock has taken an almost unthinkable tumble, plummeting from a spirited high of over 200 EUR not too long ago in 2023 to even below 100 EUR now. That’s a 50% nosedive in just two years, while the broader markets – until they got a bit tipsy a few months back – were toasting new highs. The more so shocking, as Pernod Ricard is seen as a “recession-proof, high-quality company with valuable brands”. Is this a rare chance to grab a premium spirits stock at a bargain, letting its value intoxicate your portfolio? Or could it trap you in a value hangover?
Summary and key takeaways from today’s Weekly
– Pernod Ricard looks very attractive – but only not the surface.
– Business fundamentals have worsened and a shift in trend is not there.
– The truth is, even despite its strong decline, the stock is still very expensive, leaving no margin of safety.
In the past, I had already written about the “Jack Daniel’s stock” Brown-Foreman (ISIN: US1156372096, Ticker: BF.B) as well as about alcohol stocks in general (see here and here).
The broad perception among many investors is that
- alcohol stocks as a group are “the less evil” of the sin stocks, especially in comparison to tobacco or cannabis
- they have enduring and high-quality alcohol brands
- these companies are recession-proof (assuming people drink even more during economic hardship)
As I have laid down in my Weekly about alcohol stocks, this thesis seems to have gotten some cracks. Otherwise, it is not possible that almost an entire industry sees falling stock prices of this magnitude.
However, there likely comes a time, when stocks of a certain quality level start to become interesting again – it is a question of what you get for your money. We are dealing here with highly profitable businesses, not questionable startups full of visions, but void of cash flow.
At a certain point, everything bad is priced in.
This time, I am looking at another industry leader – the French spirits powerhouse Pernod Ricard (ISIN: FR0000120693, Ticker: RI).
Its stock has fallen almost in a straight line from 200 EUR to now even below 100 EUR – at a time when indices have had two phenomenal years 2023 and 2024. We all know how 2025 has started so far. Wouldn’t it make sense to look for attractively priced, more economically robust stocks?
Pernod Ricard is valued at a PE ratio of 13x and its dividend yields 5% – worth a sip?
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Time to party again or prolonged hangover?
Pernod Ricard is truly a titan in the global spirits and wine industry. It was born in 1975 from the merger of then-independent Pernod and Ricard, two French anise-based spirit makers. The Ricard family is still a big shareholder with 15% of equity controlled by the family. The CEO and Chairman is also from the Ricard family.
Headquartered in Paris (where else?), the company has grown into the world’s No. 2 producer of premium wines and spirits and seeing itself as the primus inter pares among the spirits producers.
Measured by market cap, Pernod Ricard is trailing only the British juggernaught Diageo (ISIN: GB0002374006, Ticker: DGE) when seen as a whole. However, in EUR terms, the difference is pretty significant with Diageo having a market cap of 54 bn. EUR, compared to Pernod Ricard’s “only” 24 bn. EUR.
By the way, both companies have lost roughly 50% from their respective highs.
But back to the Frechmen, as is common in this sector, Pernod Ricard’s journey from a regional player to a global powerhouse has been fueled by strategic acquisitions like Absolut Vodka (for 5.6 bn. EUR in 2008) and Jameson Irish Whiskey (for only 370 mn. EUR in 1988 when it bought Irish distillers), blending traditional craftsmanship with modern distribution.
Pernod Ricard’s brand portfolio today is like a top-shelf bar, boasting not only heavy hitters like Absolut Vodka and Jameson, but also Chivas Regal Scotch. They also pour premium vibes with Martell Cognac and Perrier-Jouët Champagne.
But they also own more entry-level brands like Ballantines blended Scotch as well as certain more regional names like Seagram’s or sweet spirits like Havana Club and Lillet (see here their portfolio).
All in all, more than 200 brands worldwide and 18 of the world’s top 100.
As I have written about alcohol stocks – this is still a rather contrarian view – I think that the entire alcohol industry is undergoing through tremendous shifts. I do not view this decline as just a cyclical dip or the likes, but rather a structural crack, more comparable to tobacco where volumes have been falling not since yesterday.
Not only are people switching more from premium to cheaper brands due to rising costs of living, but each following generation has consumed less alcohol than their ancestors.
However, as we’ve seen with tobacco stocks, there comes a time when sentiment is too bad, driving valuations into the basement.
Even in a shrinking market, it is absolutely possible not only to grow as a company, but to see thriving stocks, because expectations are so low. Under the condition that the underlying businesses are still doing well, respectively even are modestly growing, this makes for an interesting target for stock pickers.
Until here, it was very painful to buy every dip, only because the stock has fallen by so and so much percent from its high.
For long, I have been warning not to get greedy, only because the stocks have fallen, entirely ignoring business fundamentals and stock valuations. Many people still don’t understand that a stock at a lower price can even be more expensive than it was before. This happens when the underlying business deteriorates.
Pernod Ricard after having halved from its high, is now valued at a rather undemanding PE ratio of 13.5x while its dividend yields even 5%.
That’s practically unheard of for this sector and this stock.
But the devil lies in the details – as often.
Before we discuss the valuation metrics, we first need to have a look at the performance on a business level.
For the nine months of FY25 (1 July 2024 – 31 March 2025), Pernod Ricard reported net sales of 8.5 bn. EUR, down 4% organically (–5% reported). Volumes grew by 1%, but a -5% price/mix effect, driven by negative market mix, hurt revenue. That’s a negative acceleration from the –1.2% sales decline for the FY 2024.
The switch to cheaper brands I hinted at above.
Geographically, Asia / Rest of the World is the most important region with 42.9% of sales (and has long been the pitch for forever-growth in the industry). Americas contributed 28.8% and Europe 28.3%, roughly on par.
Asia-Pacific, especially China, slumped with a –6% organic sales drop, hit by weak consumer sentiment, tariff uncertainties and a high Q3 FY24 comparison base. Martell and Royal Salute underperformed, with Asia Travel Retail also weak. The Americas posted +3% organic growth, though the U.S. saw a hefty –7% decline. Europe remained basically flat.
The last earnings release was only about sales, without profits or cash flows.
From the latest annual report, we can see an operating profit of 3.1 bn. EUR (they call it profit from recurring operations). So far so good, still among the best results in their history.
Net income was slightly below 1.5 bn. EUR – here we see a bigger gap down as the result of a few asset write-downs. Not a good sign for a “high-quality” portfolio.
Now, looking at the respective last-twelve-months figures, we can see that the decline didn’t really stop.
Sales as written above, continued to slump. Operating earnings on an organic basis declined by 2% (per half-year results). This is less than the sales decline and explained by higher margins and better working capital management which modestly lifted free cash flow from 1.7 bn. USD per last summer to 1.85 bn. EUR per calendar year-end.
But this doesn’t change the fact that there are strong headwinds in the industry. Otherwise sales wouldn’t decline so much. Slightly better margins and cash flows due to one-time moves are only cosmetics. On a different front, we are not talking about cosmetics, though.
What I absolutely do not like is that net debt has risen to new highs.
A portion of the net debt figure at TIKR is leasing liabilities. Taking them out, we arrive at let’s say 10 bn. EUR net financial debt for a better calculation further below.
As EBITDA is slowly falling back to 2022 levels, the net debt to EBITDA ratio has increased again to 3.5x. While not an existential threat for the company, this is nonetheless a considerable amount of debt and rather not leaving much breathing room for potentially growth-lifting acquisitions (even if only on paper).
Especially in a tough and challenging business environment, I do not like to see high leverage. It has grown in relative, but also in and absolute terms.
My last category is shareholder distributions. To not make it too long, management has aggressively spent on buybacks when the stock was at its highs while continuing to meaningfully increase the dividend.
Almost self-explanatory, over the last twelve months, when the stock dropped heavily, buybacks were not even 150 mn. EUR. Closer to the stock’s highs, management had no issues with spending several times that figure yearly.
The dividend was cut in 2020, but otherwise it has been in an upward trend.
Below, is the dividend per share.
The problem is, the dividend consumes now 1.2 bn. EUR yearly.
With an “improved” operating cash flow of 1.85 bn. EUR and to be subtracted 0.75 bn. EUR in capital expenditures (record Capex in a declining market, I shall add), effectively the dividend is not even covered by free cash flow!
I do not see people being afraid about that.
The thing is, besides “safe demand”, “strong portfolio of brands” and all the other shaky bull arguments, alcohol stocks are often bought for their reliable dividends.
Should the situation not improve or at least stabilize rather quickly, the dividend is clearly in danger of being cut. The current 5% yield looks juicy now, but only on the surface. I wouldn’t bank on that.
Last point, the seemingly low valuation. Sure, a 13.5x PE ratio looks undemanding. Weren’t it for the (rising) debt, I may be even potentially considering to spend more time on this case. But adding the 10 bn. USD to the market cap of 24 bn. EUR, the resulting enterprise value of 34 bn. EUR against a free cash flow of 1.1 bn. EUR looks lofty, but certainly not cheap.
That’s still a 30x multiple – even though the stock has halved!
With business fundamentals having deteriorated further and no turnaround insight, this is clearly not an attractive option to consider. There’ absolutely no margin of safety.
Sure, management could (and likely should) cut Capex to reduce cash outflow. Even if they miraculously increased free cash flow to 1.5 bn. EUR to fully cover the dividend again and make it look like the business has improved, we’d still be talking about an EV / FCF of 23x – this still implies solid double-digit growth of 10–15%.
Where shall that come from?
Pernod Ricard’s stock looks like a fine spirit that’s been left out with too much ice, diluting its once-robust flavor into a watery value trap.
Conclusion
Pernod Ricard looks very attractive – but only not the surface.
Business fundamentals have worsened and a shift in trend is not there.
The truth is, even despite its strong decline, the stock is still very expensive, leaving no margin of safety.
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