Pernod Ricard: Reopening Now Priced In, Downgrade To Neutral (Preview)

Rating Downgrade (RI FP) (Buy to Neutral)

Summary

• We are downgrading our rating on Pernod Ricard from Buy to Neutral on valuation grounds after a 19.0% gain in 22 months.

• A combination of its current valuation and forecasted earnings growth mean the stock's annualized return will likely be below 10%.

• We assume a long-term Net Income growth of 7.0%, 2 ppt higher than the FY10-19 average and corresponding to the midpoint of targets.

• We assume a 2024 P/E of 27x, which we believe appropriate for a cyclical industry and only 1x below the present and the pre-COVID peak.

• With shares at €188.65, we expect an exit price of €214 and an annualized return of 6.6% (total of 21% by 2024) below our target.

Introduction

We are downgrading our rating on Pernod Ricard from Buy to Neutral on valuation grounds after a 19.0% gain in 22 months. Pernod Ricard stock has recently hit an all-time high and is now 8% above its pre-COVID peak.

We originally initiated a Buy rating on Pernod Ricard in August 2019, a few months before COVID-19 started to appear in …