EUR 850.00 For Business Accounts Only

Morningstar | Pernod Still Performing Well, but 3Q Miss Shows Frothiness of Expectations Already Priced In

After three quarters of the fiscal year, narrow-moat Pernod Ricard is performing almost exactly in line with our expectations, with year-to-date organic growth of 6.3%. Third-quarter organic growth of just 2.5%, however, fell short of consensus expectations, although weakness in France and channel inventory corrections in the US were both known events. We are reiterating our full-year estimate of 6.2% organic sales growth because it is possible  fourth-quarter growth will normalize if commercial disputes in Europe are resolved. We regard 6% organic growth as a respectable performance, especially in light of the struggles most other large cap consumer product manufacturers face when delivering top-line growth. This also reflects Pernod's strong price/mix and emerging market growth drivers. The fact it missed consensus estimates in the third quarter, however, highlights the optimistic expectations currently being priced into the stock, and we think Pernod is slightly overvalued at current levels. We have raised our full-year sales growth estimate to reflect more favourable currency movements, but this has no impact on our EUR 134 fair value estimate.

The top line may have missed consensus estimates, but for the second time this fiscal year, Pernod raised its full-year guidance to 8% organic growth in profit from recurring operations, the high end of its previous range. We already forecast aggressive profit growth of 12%, which includes the benefit from currency, so we make no adjustment to our margin forecasts. Further out, however, we still expect Pernod to expand its EBIT margin by about 80 basis points over the 28% margin we expect it to achieve in 2019. The company's transform and accelerate three-year plan includes a target for EUR 300 million in total cost savings, a fairly modest target, with a further boost from mix. As such, there is a lot to admire about Pernod's future cash generation potential, but we believe much of this looks priced in.