A 34% share rise puts LVMH chairman in line for world’s richest person

A buoyant 2021 for the big international drinks groups, including LVMH, which owns Moet Hennessy’s wines and spirits division, points to a booming summer boosted by overseas travel restrictions and bumper staycation spending.

It may not seem like it to the myriad hospitality venues struggling with continuing anti-coronavirus restrictions, consumer wariness and staff shortages. But the big international drinks groups whose shares are easily purchased in London  have already enjoyed a buoyant 2021.

Since January, Diageo and Pernod Ricard have seen their shares gain 17% and 18% respectively on the back of stronger-than-expected recoveries from the depths plumbed in 2020.

Shareholders in beleaguered Treasury Wine Estates have enjoyed a 22% uplift in the value of their holdings while those invested in Davide Campari Milano have chalked up a 20% rise.

Even more spectacular is the 34% rise in the shares of the world’s premier luxury goods empire, LVMH.

To put those gains into perspective, the London market overall has risen by 10% since Christmas while Paris is up by nearly 18% and Wall Street has gained a mouth-watering 22% on the back of President Biden’s mammoth stimulus to the economy to boost the American economy as it emerged rapidly from the pandemic despite suffering one of the highest death rates.

Overall, the eight stocks in the drinks business global portfolio (which makes no pretence at being either balanced or recommended) have gained 13% so far this year, meaning that £1,000 invested equally in each of them is showing a profit of just more than £900 in six months plus dividend payments.

And while chief executives remain cautious about the pace of recovery (especially as travel retail remains severely affected), there is little doubt that they are edging towards “glass half full” optimism.

The two biggest, Diageo and Pernod Ricard, drew the line under their 2020/21 financial year last Wednesday and will report those figures in a few weeks’ time. But already investors are confident about them.

Pernod Ricard has twice this year raised its guidance on what the numbers will show, predicting a 16% uplift in sales compared with the dark days of 2020. Similarly, Diageo has said it will beat its own earlier estimates with growth to top 10%.

Significantly, both companies have unblocked their share repurchase schemes (which enhance value to existing investors) and both have confirmed that they are open to further purchases of niche brands to enhance their portfolios. The same is true of Campari.

The China tariff crisis, cutting off a staggering 40% of its exports, has forced Treasury Wine Estates to re-evaluate its business model, selling off its weaker US lines and making the premium Penfolds brand a separate profit centre, refocusing its export drive.

Chief executive Tim Ford has acknowledged that it will take at least a couple of years to fully reinvigorate TWE but observers predict that the outcome will be a more dynamic and resilient company. So while the shares remain some 35% below their 2018 high, the rise of 22% in the past six months shows he is generating long-term confidence.

The spectacular 34% rise so far this year in LVMH (which includes the Moet Hennessy wines and spirits division) has put chairman Bernard Arnault in neck-and-neck rivalry with Amazon’s Jeff Bezos for the accolade of the world’s richest person.

The group’s sales have been revived by the substantial resilience in demand for luxury goods and the successful takeover of jeweller Tiffany at the start of the year. However, there are worries that its incredible recovery (the shares are up by nearly 90% since the depths of summer 2020) has been ahead of the market and that a correction could be due.

When it became evident in the autumn that the American consumer had switched alcohol consumption to home entertaining both Constellation Brands and Brown Forman saw their shares enjoy an early recovery bounce. The Europeans have been playing catch up since Christmas.

Brown Forman is the only big player to have suffered a price fall since Christmas, its shares dropping by 4%.

The group has been affected by special factors, not least the continuing punitive European tariffs on American whiskey as part of a transatlantic trade spat. The company’s head, Lawson Whiting, reckons that is costing Brown Forman at least £50m a year.

In addition, because Brown Forman’s business (notably Jack Daniels) is more skewed to the on-trade than its major rivals, it was disproportionately hit by the pandemic closures and was slow off the mark to meet the ready-to-drink boom and exploding hard seltzers market.

It is seeking to address that problem through the recent alliance with brewer Pabst and has committed to a £95m doubling of its production capacity at its Louisville site. Pro tem, however, Gentleman Jack, has been left on the back foot.

Not so Constellation Brands. Despite marginally missing analysts’ forecast for the first three months of its financial year, after its announcement last Wednesday the shares moved close to the height that they reached in February. Constellation has gained 7.5% so far in 2021.

Although profits were slightly below expectations, strong sales were a predominant theme. Beer sales, including the Corona and Modelo brands, were up 14% year on year to $1.57 billion, offsetting a 22% decline in sales of wine and spirits. That was the result of Constellation selling many commodity brands to enhance its long-term margins.

Investors were impressed by the company’s confidence.  Constellation expects beer sales to climb between 7% and 9% for the full year. Not only did it increase its earnings forecast for the rest of this year, but it also advanced by $500m its share repurchase scheme as part of its plan to return $5 billion to investors with five years.