Pernod Ricard (EU:RI) shares dropped more than 3% on Monday after Deutsche Bank lowered its recommendation on the stock to “sell” from “hold,” arguing that this year’s sharp rally has moved ahead of underlying business fundamentals.
The downgrade follows the company’s recent first-half fiscal 2026 results, which showed organic sales declining 5.9% and EBIT down 7.5%, broadly matching market expectations.
Deutsche Bank analyst Mitch Collett said the valuation now looks stretched, noting that Pernod trades at roughly 15.2x calendar 2026 earnings — only a 14% discount to European beverage peers. In his view, that gap does not sufficiently reflect the company’s leverage level of 3.8x net debt to EBITDA and an uncertain growth outlook.
According to the bank, the stock’s roughly 20% gain year to date appears largely driven by positioning effects, particularly the unwinding of heavy short interest, rather than a meaningful improvement in operating performance.
Two main risks support the downgrade. The first is leverage. Management has pledged to reduce net debt/EBITDA to below 3x by fiscal 2029, but achieving that goal depends on earnings recovery, ongoing asset disposals and strict capital discipline over several years, leaving limited room for setbacks in key markets such as China or the United States.
The second concern relates to expectations for a second-half rebound. Consensus forecasts imply around 1.2% organic sales growth, which Deutsche Bank believes relies more on favorable timing effects around Chinese New Year and easier comparisons than on a genuine recovery in demand. Management itself described the outlook for China as largely technical.
Collett also suggested that a deeper reset in profitability and shareholder returns may be required before the shares can sustain a meaningful re-rating.
The company continues to maintain its €4.70 per share dividend, though without growth, while free cash flow coverage remains tight. Gross margins are still under pressure from tariffs and higher costs for aged inventory despite a 10% reduction in structural expenses.
Jefferies, meanwhile, retains a “buy” rating with a €110 price target, pointing to the valuation discount and confidence in the company’s efficiency programme. However, that more optimistic view depends on belief in Pernod’s medium-term growth target of 3%–6%, a scenario Deutsche Bank does not currently support at prevailing share prices.
Potential upside risks include a restocking cycle in the U.S. market or policy stimulus measures in China. Until clearer signs of sustained revenue growth emerge, Deutsche Bank believes the recent rebound in the shares may have largely run its course.
Leave a Reply