Since 2023, the alcoholic beverage industry has dramatically underscored the entire consumer defense sector. It left many European listed drink stocks that are undervalued according to Morningstar metrics.
Comparing the stock prices of these stocks was a negative quarter, but most of all there was uncertainty about US trade policy. The US Trade Court has found most of the obligations imposed by the Trump administration to be illegal, but the White House has already begun appeals.
Cultural factors also work, with long-term health trends supporting drinking and undergroundism. “Dry January”, after an excess of festive season, people give up on alcohol.
We and Chinese drinkers are key to selling
According to Verushka Shetty, a stock analyst at Morningstar, there are long-term factors behind the sector’s current weaknesses.
For example, consumption of alcohol, particularly spirit, is cyclical and is currently on a downward trend after the boom during COVID period. This decline in sales in recent years was surprising as investors assumed that companies could maintain sales at the level recorded during the pandemic. Another determinant is the specific weaknesses of several major markets, such as China and the US.
“This is a problem for the industry. The US is the most profitable region for many alcoholic beverage companies, and Chinese consumers spend the most on vacation,” says Shetty.
“In addition, many US buyers have decided to dispose of their stockpiles, withholding more clarity in their work.”
Did consumers oppose alcohol?
An important trend is that people are drinking less than they have in the past, and Shetty companies in the industry focus this on the various ways young people focus on health and fitness and interact in places like gyms and coffee shops rather than pubs and bars. Health regulators are also considering intervening in alcohol marketing.
The World Health Organization recently proposed labeling all alcoholic beverages and informing consumers of alcohol and cancer links.
“In fact, the decline in alcohol consumption has been a trend for generations, much slower than people think, and to see the significant impact on the profitability of companies, the decline in consumption must be at a much higher level than it is now.
“We feel that, unlike to cigarettes, we share the views of many industry managers that alcohol consumption is linked to celebration events and sociability, regarding the possibility of alcohol label regulation.
It also takes into account the growing consumer preferences for premium brands. This trend, which is already happening in developed markets, has also spread to emerging markets, analysts who argue that the trend should support future profit margins.
Therefore, Morningstar analysts believe that most of these debilitating factors are likely to disappear over time. However, US tariffs add a lot of short-term uncertainty. For this reason, companies that are industry leaders and have diversified portfolios in terms of product and geography should be able to withstand these current pressures.
Where are the undervalued stocks in the drink industry?
Of the 30 stocks in the sector covered by Morningstar Analysts, four have a 3-star rating, while the remaining 26 have a 4- or 5-star rating.
Davide Campari-Milan
The first quarter numbers showed a 4% decline in revenue compared to last year, but Morningstar analysts believe the current challenges are temporary.
“The decline in Campari sales is also about customers easing inventory. They prefer not to follow up with new orders to clarify the obligations imposed by the US on importing alcoholic beverages,” says Verushka Shetty.
“While the job expects profit margins to decline in the short term, the resilience of sales in the Apartisan segment in the first quarter indicates that Campari has endured the current challenges and has a card that can achieve medium-term guidance.”
Remy Cointrow
Remy Cointrow’s shares have fallen 15% since the start of the year and are currently trading at a fair value of 119 euros and a 60% discount. The French company is the second largest producer of cognac in the world, accounting for 72% of sales and 90% of revenue. The stock reached its lowest point in a decade, around 40 euros, in the wake of a sale generated by the announcement of its US duties, but analysts believe the company can achieve its long-term goals.
“Management has checked its operating margins of 21% to 22% for revenue targets for 2025, and repeated the 2030 targets of 72% total margin and 33% operating profit margin. We believe these targets are achievable, but the uncertainty in US tariffs depends on them,” says Shetty.
Pernod Ricard
With a spirit portfolio of over 240 brands including Absolut, Beefeater and Chivas Regal, Pernod Ricard is the second largest sales distiller in the world, after the UK’s Diageo. The number of disappointments in 2024 has led to stocks losing 34% over the past 12 months, resulting in a decline in sales. The shares are currently below the fair value estimate of 121 euros.
“The company has contracted with low sales in key markets such as China, Europe and India, but management has confirmed its forecast for 2025.
“These forecasts take into account the negative effects caused by our duties, in line with our estimates. Distillers often find themselves caught up in the crossfire of trade wars, but industry leaders have a track record of mitigating tariff increases.
Diageo
Diageo’s shares have lost more than 20% so far. At around £20 per share, they are below the fair value estimate of £25.90. Third quarter figures showed a 5.9% increase in sales (net from the impact of exchange rates), but the management of UK companies continues to expect profit margins to decline in the second half of fiscal year 2025, along with the decline already seen in the first half.
“We expect these weaknesses to be temporary and we expect average revenue and revenue progress to be 7.6% and 4.6% for the next five years, respectively,” Shetty says.
Heineken
Heineken’s shares have risen 17% since the start of the year, but the company has suffered losses over the past 12 months. At current market prices, the stock of the world’s second-largest brewer is below a fair value of 92 euros.
The first quarter numbers reflect concerns about economic slowdowns and currency volatility.
However, there were positives particularly related to EM exposure. Shetty said: “The quarterly sales decline was mitigated by price growth supported by the strong weight of premium brands in our portfolio. We were also impressed with expanding sales in Vietnam, China and regions, including sales sales, including sales representatives, including sales representatives, including sales representatives, including sales representatives, which have acquired sales gains for sales sales in Vietnam, China and Niger. China.”
“Despite tariff concerns, management has confirmed its forecast for 2025, with organic operating profit growth (net exchange rate) of 4%-8%, and we continue to believe Heineken is one of the world’s most powerful premium beer portfolios and is well-established to gain a share in the strategic market.”
