Major spirit companies have not been making their owners very happy lately. Over the past 18 months, stocks have been sluggish, and analysts have lowered profit forecasts by around 30 percent on average.
Bank of America states in a new sector analysis that the worst may be over now, except for the Chinese market, which is expected to remain subdued.
“We do not expect the industry’s growth to return to pre-pandemic levels, but consensus already reflects a slightly lower level, and we still expect spirit companies to deliver sales and profit growth at least as good as other consumer goods. Valuations are also at their lowest in years and are reasonable relative to the sector’s valuations,” the analysis states.
The major international brands can benefit from demographic trends, their premium brands, and a larger share of the alcohol market, which are positives. However, some headwinds may come from the younger generation with more cautious drinking habits.
Fine Spirits Gaining Market Share
When it comes to different product categories, there are two clear growth drivers in the last five years. Tequila leads with over 15 percent annual growth in value, followed closely by Aperitif.
Irish and American whiskey, along with gin, are other fast-growing categories, while cognac and vodka, for example, have seen slower growth.
Bofa analysts expect tequila to continue growing faster than the market in the future, as well as American and Irish whiskey and aperitif. Gin may have reached its peak, except for the most premium brands.
As for the stocks of four of the major companies in the sector – Diageo, Pernod Ricard, Campari, and Remy Cointreau – Bofa has a buy recommendation for the first three while being neutral on Remy.
The top pick in the quartet is Campari, which has the best-selling Aperol in its portfolio. Analysts see an opportunity for the company to outperform the sector and note a more resilient sales performance. The P/E ratio of 23 is a premium compared to European stocks in other consumer goods, but lower than the usual valuation premium.
The target price for Campari is €10.20 per share compared to the current price around €8.30, indicating a 23 percent upside potential.
Analysis:
The spirits industry has faced challenges in recent times, but according to Bank of America’s analysis, there is hope for a recovery. With demographic trends and premium brands on their side, major spirit companies could see growth in sales and profits. Investors may want to consider buying stocks in companies like Campari, which have strong performers in their portfolios and potential for growth. Keeping an eye on trends in product categories like tequila and aperitif can also help investors make informed decisions. Overall, the spirits industry may be on the path to a comeback, offering opportunities for investors looking to capitalize on market trends.