Opinion: Take advantage of listed multinational’s discounted shares

Now is the time to buy shares in listed drinks groups, according to our city news editor.

Ryan Reynolds has partnered with Proof Drinks to distribute his Aviation Gin brand in the UK

There are opportunities to grab holdings in historically resilient companies which have seen their shares fall during the global lockdown before they recover fully and resume what most forecasters believe will be a strongly upward trend over the next few years.

As the world braces itself for new episodes of coronavirus and investors look nervously at the potential consequences, the major drinks producers have been getting fitter and leaner to benefit from whatever the new normality brings.

Undoubtedly, duty free is a disaster area that will recover only very slowly, but all the major producers have reported in recent trading statements that volumes have been at least partially made up, particularly in the US take-home sector.  Nor does this ignore that on-premise consumption has taken a severe hit over the past six months with restaurants, bars and clubs around the globe shut during lockdowns and some locations such as South Africa and parts of India halting alcohol sales completely. But nobody is as gloomy as in March and April when trading forecasts were withdrawn and replaced by statements effectively saying “We have no idea” or “You tell us”.

Quietly, a picture is emerging of producers recovering more solidly than even their directors expected and beating analysts’ forecasts on trading levels. Davide Campari, Brown Forman, Constellation Brands and Remy Cointreau have all recovered from the 30%-plus share price slumps of March and April. Diageo and Pernod Ricard remain 10% and 19% respectively below the highs they reached at the start of 2020 but both have recently issued “better than expected” trading statements covering the late summer.
Only last week Diageo’s Ivan Menezes told the annual meeting: “We have made a good start to fiscal 21 [which began in July], with sequential improvement in our performance across all regions.” He said the “US business [which accounts for 40% of the company’s profits] is performing strongly and ahead of our expectations, reflecting resilient consumer demand.”  And although last week Constellation Brands declined to offer a forecast for the months ahead, nevertheless it beat Wall Street’s consensus forecast for its second quarter performance. This prompted commentators to take a cautiously optimistic stance.

There will be share price fluctuations of course but the overall trend is one of recovery. Why? First, the consumer is displaying overall resilience. Despite restrictions, people are switching their consumption pattern, not abandoning it. Strongly rising spirits sales in take-home outlets reflect that.

Second, groups have taken the axe to costs. Advertising and promotions have been slashed or at least put on the back burner while extra value is being squeezed from the continuing activity in the marketplace, especially through further focus on digital channels.

Social media metrics generate much clearer and immediate understanding of consumer demands and developing trends, thus allowing companies to be quicker on their feet to meet them. The bigger the brand portfolio, the better the potential for rapid fine tuning.

Third, the collapse of global travel retail is not a complete disaster, even though it will take years to recover fully. Some high end stocks have been rerouted to other pipelines such as the buoyant off-trade in the US. At the other end of the spectrum, the ability to give maturing spirits (and champagne marques) extra ageing will permit additional future sales of premium lines.

That carries a finance cost but major players are refinancing debt at advantageous rates. Replacing maturing debt with new loans is a normal finance function, but with bond market rates at record lows, Diageo, Pernod Ricard and Davide Campari have all moved to cut their average borrowing costs during the past six months, some of them twice.  That not only feeds through to earnings per share and profitability by lowering management costs, but it also gives extra firepower in the takeover market.

Undoubtedly there will be a growing trend of niche takeovers by bigger groups as smaller producers with weaker finances look for support after the ravages of 2020.

In the past six months, for instance, Pernod Ricard has taken full control of Monkey 47 gin, has bought a stake in small-batch mezcal brand Ojo de Tigre, and has moved into Spanish vermouth via buying Vermuteria de Galicia, producer of the St Petroni brand. Diageo has moved on Aviation gin, increased its stake in India’s United Spirits to 56% and continued to make seeding investments in young companies through its Distill Ventures arm. Campari has bought Champagne Lallier, the Tannico e-commerce company in Italy and Baron Phillippe de Rothschild France Distribution. Constellation Brands remains in negotiations to refocus on beer and spirits by selling its US wine interests to Gallo. The deal still has regulatory obstacles to overcome in the US but both sides are confident of overcoming them.

These moves strengthen those companies and indicate expanding profitability once the world gets to grips with coronavirus.

Even the wasteland that is Australia’s Treasury Wine Estates has some followers predicting better times. Even without the effects of Covid 19, the group has faced serious challenges. Droughts and forest fires depleted the 2020 harvest. The company’s own shareholders launched class actions against it, claiming misleading statements about its problematic US business. The chief executive retired, and the company bore the brunt of investor disillusion as China (Treasury’s biggest export market) threatened punitive anti-dumping tariffs as part of a diplomatic war with Canberra. That, optimists say, was a perfect storm that is unlikely to reoccur.

At the end of the day, the multinationals have well identified growth plans that have been battered, but not blown off course by Covid. Unlike companies in other sectors, not least hospitality in its present form, they have the capacity to return to prosperity.