HEARD ON THE STREET: A Hiccup In Pernod's Recovery

23rd Jul 2010 12:59

By Matthew Curtin A DOW JONES COLUMN Managing shareholder expectations is a rum business. Investors punished Pernod Ricard Thursday after the French spirits company revised upward its profit guidance for the year to end-June - just not as aggressively as hoped. Short of a double-dip recession, the 2% fall in the share price leaves the stock looking far from expensive. Pernod, maker of Absolut vodka and Beefeater gin, said fiscal-year operating profit rose between 3% and 4% on a like-for-like basis, higher than its previous 3% forecast. But after a strong third quarter, when sales were up 16% as bars and shops started restocking and demand for premium spirit brands rebounded, the market was expecting growth above 4%, particularly with a weak euro flattering sales. Instead, Pernod's sales growth decelerated sharply to 3% in the fourth quarter partly due to seasonal factors and slower restocking. Sales actually fell in Western Europe reflecting the tough economic climate in the UK, Spain, Italy, Ireland and Greece which account for around 15% of revenues. The euro has also rebounded against the dollar since early June. Pernod is still increasing spending on advertising and promotion back to pre-crisis levels, which is good for long-term growth, but less for near-term profitability. But shareholders still have much to celebrate. Pernod is still saddled with net debt of more than EUR10 billion after gearing up to buy Sweden's Vin & Sprit not long before the financial crisis struck in 2008. But sales of non-core brands are on track to help reduce net debt to below four times Ebitda in 2012 from 5.5 times at the end of 2009. Meanwhile fourth-quarter sales of its top 14 brands rose 6%, raising hopes drinkers are trading back up to pricier tipples. Growth was strong in Asia and Latin America and improved in the US. And Pernod has yet to apply itself fully to Absolut, currently outsold two to one by Diageo's Smirnoff. Its track record reviving the under performing Seagrams and Allied Domecq brands acquired in 2001 and 2005 respectively is encouraging. The shares trade at 13.9 times forecast 2011 earnings, in line with the sector average of 13.5 times. That looks too low. (Matthew Curtin has been a financial journalist since 1990. He has written on international finance and business - from South Africa, Singapore and France - since 1994. He can be reached at +331 4017 1746 or by email: [email protected]) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires July 23, 2010 07:59 ET (11:59 GMT)