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Remember the “eyeballs” that supported the dotcom craze? Investors are no strangers to innovative valuation metrics. Those in the beverage sector now have something new – and less egregious – to pay attention to: the business value of “mature liquids.”
With beverage companies trading at record lows compared to its stocks of gently aged cognacs, brandies, tequilas and champagnes, this is another indication that the sector may be oversold.
Alcohol suppliers have clearly had a terrible time lately. Shares of Diageo, Campari, Pernod Ricard and Rémy Cointreau are down between 20 and 40 percent over the past 12 months. There is no shortage of good reasons. Diageo’s stumble is partly of local origin, given its supply problems in Latin America. Rémy Cointreau and Pernod Ricard have been hit by fears that China could impose tariffs on brandy. Most worrying of all for companies across the sector is the fact that the United States, the world’s most lucrative alcohol market, has retreated: Spirit volumes fell 3.3 percent in 2023.
This uninspiring cocktail means that European drinks companies now look relatively cheap by almost any measure one cares to consider. Diageo’s historical premium on an ap/e basis relative to the MSCI Europe index has compressed from around 100 per cent in 2022 to 33 per cent. The same is true when you compare the value of beverage companies with that of their mature liquids portfolio, as Trevor Stirling has done at Bernstein. This is accounted for at historical cost adjusted for evaporation or, in lovely sector parlance, angel share.
Of course, stocks are not equally relevant for all companies. Those whose business relies most heavily on aged spirits, like Rémy Cointreau, maintain inventories larger than annual sales. Campari, at the other end of the spectrum, has less than a fifth. However, at least directionally, company valuations by this metric tell a similar story. Diageo, Pernod and Rémy Cointreau are trading at lows in more than 10 years.
That seems too despondent. Despite the current fluctuations, the sale of beverages is still a good business. When the hangover of the Covid era finally wears off, this will be a sector where annual volumes will grow perhaps a couple of percentage points a year, prices will rise and consumers will increasingly choose premium drinks. With the entire industry enjoying Happy Hour discounts, it may be time for investors to hit the bar once again.