Analysis: The performance of major drinks groups this year

In a year which has seen an activist investor take a 2.5% stake in Pernod Ricard, Diageo’s share price continue to rise and LVMH make the largest acquisition in its history, Ron Emler explores how drinks groups have fared in 2019.

Battle lines drawn, but no sign of hostilities. A year ago US hedge fund Elliott took a 2.5% stake in Pernod Ricard worth $1bn and triggered expectations that it would shake up the French spirits giant.

The aggressive investor was looking for luxury returns from an investment in premium drinks.

Premium drinks have become a “safe haven” for investors in turbulent times because their spread of global distribution and greater resistance to any consumer downturn in trade patterns has provided a virtual guarantee of continual profits and dividend growth while stock markets oscillate.

So Elliot’s investment in a prime company it felt was underperforming was not surprising.

But in the past 12 months there have been no public signs of tension between the two groups, largely because Pernod Ricard had already put in place measures to boost its performance through its ‘transform and accelerate strategy’.

The board has been shaken up, plans are afoot to merge the Pernod and Ricard pastis businesses in their French home market, the brands portfolio has been tweaked and the company is en route to boosting margins to a level more comparable with Diageo’s.

And despite a somewhat understated performance in the quarter until the end of September, Pernod Ricard’s shares are ahead by more than 15% in 2019, with shareholders also enjoying an increased dividend.

That is the sort of performance Elliott was seeking, especially as its return has been generated by simply sitting on its stake. But the American activist investor will expect more of the same in 2020.

Pernod Ricard has already issued solid guidance on its likely performance, despite potential awkward currency fluctuations, especially if sterling weakens in the aftermath of Brexit and hits scotch revenues.

Equally, speculation continues that the French group might sell its wine business including brands like Brancott Estate, Campo Viejo and Jacob’s Creek.

Branded wines sit uneasily in the portfolio, analysts suggest, with margins much lower than for premium spirits. Unload the wines and the company’s return on capital would move ahead, as would its shares, they say.

Yet while Pernod Ricard is making the sort of strides Elliott and other shareholders were looking for, its rivals are not standing still, not least Diageo.

Diageo, the world’s biggest premium drinks group, is valued at about £73bn, twice the size of Pernod Ricard. It has a consistent record of increasing its dividend every year and is 80% owned by institutional investors, a sure sign of confidence.

Its margins are notably ahead of Pernod Ricard’s and chief executive Ivan Menezes is driving a relentless programme of margin improvement and profit increase. Diageo is now regarded as one of the most admired companies in the luxury sector and has seen its share price rise by more than 80% in the five years since Menezes took the helm.

So far in 2019 Diageo’s share price is up by almost 15%, having been almost 30% ahead earlier in the year. Anxieties about the global market for scotch against a background of possible trade wars are a factor in investors’ minds, but Diageo is confident of meeting its target of mid single-figure growth in organic profits in this financial year and is setting a continually high benchmark for its rivals.

If bumper profits are the name of the game then investors in the world’s leading luxury goods group, LVMH, will toast 2019. The French giant, which incorporates Moet et Chandon champagne and Hennessy cognac as well as Glenmorangie, Chateaux d’Yquem, Cheval Blanc and Cloudy Bay, has seen its shares soar by 60% this year, aided by the recent $16.2bn purchase of Tiffany.

LVMH is a profits powerhouse and has huge growth potential among the burgeoning wealthy in Asia and the Middle East to whom ostentation is a non-negotiable symbol of personal success.

Diageo owns 34% of the Moet Hennessy arm but any lingering hopes it may have of doing a deal with Bernard Arnault, France’s richest man and owner of LVMH, to take his controlling stake have disappeared over the horizon.

He had no problem in raising the funds for the Tiffany deal and is unlikely to sell such a trophy drinks cabinet. And that is before any xenophobic pressure is felt to keep the biggest Champagne group in French hands.

While LVMH, Diageo and Pernod Ricard have a huge geographical spread, Remy Cointreau is less ubiquitous and that showed in its first half year results to the end of September, which made only marginal growth.

The shares fell by 3% on the figures largely because Remy Cointreau forecast that the recent turbulence in Hong Kong and the knock on effect in China, where it is the Cognac market leader, would leave figures for the full year essentially static.

Even so, Remy Cointreau’s shares are almost 20% ahead so far this year.

Davide Campari Milano, has seen its share price triple over the past five years, and has put on 14% this year despite strong head winds in its core European market.

Key to growth has been the Aperol aperitif and a steady series of acquisitions under chief executive Bob Kunze-Concewitz to broaden the portfolio.

This year that included the Trois Rivieres and Mason La Mauny Martinique rums, which will not have a full impact until later in 2020. The same is true of buying control Montelobos Mezcal, which will further open the US market to the Italian group’s portfolio.

Kunze-Concewitz expects a balance of risk and opportunity in 2020 but is again confident of pushing organic growth to a new level.

One drinks group to have suffered a share price fall in 2019 is Australia’s Treasury Wine Estates. Not because it is not trading successfully, but largely because chief executive Michael Clarke is retiring in 18 months time.

Clarke is hailed as the “transformative” mastermind behind Treasury’s stock rising fivefold since he took over in 2014. In that time the company’s post-tax earnings have jumped nearly tenfold and in August it announced record results.

On the day he announced his retirement plans the shares fell by 14%, despite robust demand for wines in China, which Clarke has turned into the group’s premier market. Without that news TWE’s shares would be at about the same level as on New Year’s Day.