Morningstar | Pernod Completes a Strong Fiscal Year, but Commodity Pressures Looming
Pernod Ricard missed our revenue and EBIT forecasts for fiscal 2018 by a whisker, but the company is performing well and this was another solid set of results. We plan to tweak our near-term assumptions when we update our model once the company releases its annual report, but we will not be making material changes to our EUR 117 fair value estimate. We admire Pernod's narrow economic moat and the company's strong recent execution, but we still believe that its growth opportunity is priced in, and regard the current multiple of 23 times fiscal 2019 earnings as being slightly too rich.Pernod's full-year organic growth of 6% is impressive, both in its magnitude and for the breadth from which it was derived. Many things are going right for Pernod at present. Some of its key strategic brands are on fire, with Martell and Jameson both growing 14%. China and India have both returned to strong growth, contributing to 9% growth in the Asia-Rest of the World segment. Even Absolut, which has been a drag on performance recently, contributed 2% growth.
Profit from recurring operations grew 6%, in line with guidance, driven by gross margin improvement of 15 basis points on an organic basis. Improving pricing contributed to the margin expansion, and we expect further pricing across most of the portfolio to drive another year of mid-single-digit organic growth. Strong pricing will be needed, however, to offset commodity inflation in some categories such as tequila, with agave prices continuing to rise, and cognac. Nevertheless, the strength of Pernod's pricing makes our forecast of slight gross margin contraction look too conservative, and we are likely to raise our near-term gross margin assumptions.
These results increase our conviction in our longer-term assumptions, particularly our belief that 4%-5% organic growth, driven by price/mix, can lead to a further 160 basis points of EBIT margin expansion over the 2018 level of 26.2%
Pernod Ricard produces and distributes wines and spirits. Co. produces aniseed products, vodka, whisky, cognac, rum, gin, liqueurs, champagnes and wines. Co.'s activity is organized around families of products built around brands. Its brands portfolio includes: ABSOLUT vodka, Ricard pastis, Ballantine's, Chivas Regal and The Glenlivet Scotch whiskies, Jameson Irish whiskey, Martell cognac, Havana Club rum, Beefeater gin, Kahlua and Malibu liqueurs, Mumm and Perrier-Jouet champagnes as well as Jacob's Creek and Brancott Estate wines. Co. is structured into four segments constituted by the following geographic regions: France, Europe (excluding France), Americas, Asia/Rest of the World.
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