Barclays upgrades Pernod Ricard to “equal weight” as upside risks increase

Investing.com -- Barclays (LON:BARC) has upgraded Pernod Ricard SA (EPA:PERP) to "equal weight" from "underweight," citing a shift in the risk profile that is now seen as more balanced, in a note dated Tuesday. 

The new 12-month price target is €97, up from €94, implying a 4.5% upside from the current share price of €92.86 as of April 16.

The Q3 results missed analyst expectations overall, although performance in the US came in stronger than forecast. 

Despite this, Barclays remains cautious about the US business, noting continued volume-driven price reductions and value declines indicated by Nielsen data. 

These issues are compounded by weakness in the broader US spirits market and concerns about the consumer’s ability to absorb price increases, especially if new tariffs are introduced.

However, analysts believe these risks are now reflected in the share price. The company’s guidance as of H1 does not anticipate growth recovery in FY25, which aligns with market expectations.

On the international front, Barclays points to signs of easing tariff risks in China. Ongoing negotiations between China and the EU could result in the removal of cognac-related tariffs, which are much more impactful than those imposed by the US on EU goods. 

A resolution could enable the resumption of cognac sales in China’s travel retail sector. This development is considered a material upside risk.

Barclays also notes that elevated inventory levels in the US and China may reflect preemptive buying ahead of expected tariff changes and price adjustments. 

Long-term structural concerns in China remain, linked to demographic trends and economic slowdown, but these appear increasingly understood by both the market and the company.

Financially, the report shows revised estimates for FY25, with revenue expected to fall to €11.123 billion from €11.598 billion in FY24. EBITDA is forecast at €3.387 billion, with a margin of 30.5%. 

Net income is projected to decline to €1.808 billion, while EPS is revised upward to €7.22 from €6.79. Free cash flow is forecast to increase to €1.467 billion. Net debt is projected to fall to €10.842 billion, with a leverage ratio of 3.2x.

Dividend per share is held steady at €4.70 for FY24 and FY25, with marginal increases expected in FY26 (€4.75) and FY27 (€4.79).

Organic sales growth remains negative in FY25 at -2.6%, though Barclays anticipates a gradual recovery to 1.8% in FY26 and 3.5% in FY27. 

By region, FY25 sales growth is projected at -2.3% in Europe, -3.1% in the Americas, and -2.3% in Asia and the rest of the world.

Barclays says that the risks are now adequately reflected in the share price, and with geopolitical developments indicating potential improvement, an underweight rating is no longer justified.