(News Bulletin 247) – The German bank has raised its buy advice on the cognac specialist and is no longer selling Pernod Ricard. The trend in the United States is clearly starting to improve for Rémy Cointreau while the valuation of Pernod Ricard is now considered too low.

On the stock market, there was a large sector to avoid last year: spirits, and even more broadly alcohol producers. Over one year, Rémy Cointreau shares lost 47%, Pernod Ricard lost 26.8%, and their great British rival Diageo fell 20%. Brewers are not much better off: Heineken loses 13%, Carlsberg 10%.

The sector was weighed down by sluggish volumes, very high inventory levels and a difficult market in the United States. Their valuations, previously driven by an exceptional post-pandemic recovery (Rémy Cointreau’s revenues jumped by more than 40% between the financial year ended in March 2020 and that ended in March 2023), have deflated with this normalization. Which is reminiscent of the journey of luxury on the stock market, but with a more extreme trajectory.

The fact remains that investors, aware of these economic difficulties but also of the qualities of these companies, are watching for the inflection point. A first positive signal came from LVMH, a member of the cognac “big four” with Hennessy (alongside Martell, Rémy Martin and Courvoisier). Its financial director, Jean-Jacques Guiony, judged at the end of January that the worst was perhaps over for the demand for cognac. Words that propelled Rémy Cointreau onto the stock market.

This Thursday Deutsche Bank is bringing grist to the mill of the most optimistic investors on spirits.

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Change in trend in the United States

The German bank raised its opinion to purchase on Rémy Cointreau, against “hold” previously, while raising its price target to 112 euros against 100 euros while it no longer recommends selling Pernod Ricard shares, passing to “keep”, with a target adjusted to 140 euros compared to 135 euros previously.

The overseas establishment supports the prices of the two groups, Rémy Cointreau gaining 2.4% to 92.22 euros around 10:50 a.m., with a peak of more than 5%, while Pernod Ricard takes 1.1% which constitutes one of the strongest increases in the CAC 40.

Deutsche Bank wrote a fairly detailed note to justify its change of opinion on Rémy Cointreau. The bank explains in particular that in the United States, the trend is starting to improve for the champion of cognac. Drawing on data from Nielsen, it reports that volumes compared to 2019 are now stable. The bank recalls that Rémy Cointreau, in addition to a difficult market, suffered from losses of market share against Hennessy and smaller cognac players in the United States. But these losses are “starting to diminish”, argues the German establishment.

“We also believe that Remy may be about to end a destocking period, meaning that shipment growth may outpace depletion growth (simply the sales of boxes of spirits sold by a wholesaler to a distributor, downstream demand, as opposed to Pernod’s sales to a wholesaler, editor’s note) in the near future,” adds the German bank.

Last point on the United States: the rise of tequila in the country is not to the detriment of cognac. The main loser in history is vodka, explains Deutsche Bank, which points out that in reality cognac has most often gained market share at the same time as tequila.

As for China, the German bank recognizes that risks exist, both for macroeconomic reasons and because Beijing has launched an anti-dumping investigation into foreign spirits. However, Rémy Cointreau’s sales are 20% lower than the overall trend in the spirits market, which leaves room for the group to accelerate its growth, estimates the establishment. This while cognac shipments have improved in recent months.

Ultimately the current valuation of Rémy Cointreau is too low for Deutsche Bank. The stock trades at 24 times expected profits for the current financial year, in line with the average for the consumer goods sector while the group historically benefits from a premium of 56% (over five years).

Pernod Ricard too cheap

If the company manages to achieve its target of a current operating margin of 33% for the 2029-2030 financial year, Deutsche Bank estimates that its earnings per share could reach 7.52 euros and that the stock could rise to 188 euros, about twice its current level.

For Pernod Ricard, the German bank published a shorter note. The establishment notes that the French group’s action has significantly underperformed the major European indices since it went to “sell” in January 2023. It now judges that the title is fairly valued and that the couple risk-return is now balanced.

According to her, the group’s valuation remains attractive on paper, as do its structural drivers. “Longer term, we believe Pernod offers an attractive combination of exposure to aged spirits (scotch, cognac, Irish whiskey) and key growth markets (China, India, United States), combined with a range of digital tools that can provide a competitive advantage,” she argues.

Pernod Ricard is even “a quality company”, she admits. But in the short term there are still too many headwinds (such as market losses in the United States and uncertainties in China) to position yourself on the stock.