Declining Youth Consumption And Regulatory Barriers Will Weaken Market Outlook

Key Takeaways

• Shifting consumer preferences and demographic changes are structurally limiting long-term demand, revenue growth, and profitability opportunities for spirits producers.
  
• Heightened regulatory pressures, market saturation, and volatility in emerging markets are increasing costs, risks, and earnings instability.
  
• Strong emerging market exposure, broad portfolio diversification, and continued cost-saving measures position the company for resilient margins, stable earnings, and robust shareholder returns.

Catalysts

Produces and sells wines and spirits worldwide.

• Ongoing shifts toward health-conscious consumption and declining alcohol intake among younger consumers in developed markets threaten to structurally lower demand for spirits, putting long-term pressure on revenue growth across Pernod Ricard's key mature markets.
  
• Demographic headwinds, with Gen Z and Millennials increasingly moderating or abstaining from alcohol consumption, may result in sustained volume declines and limit addressable market growth, thereby constraining both topline and profitability prospects.
  
• Consistently rising regulatory barriers-including new or higher alcohol taxes, stricter advertising rules, and protectionist trade measures like tariffs in China and potential tariffs in the U.S.-are likely to increase operational costs and dampen net margins, while simultaneously raising compliance risks and uncertainty for the next several years.
  
• Market saturation in high-margin premium categories and backlash against premiumization trends-exacerbated by affordability issues and economic stagnation in Western markets-could undermine the company's revenue per bottle ambitions and drive negative mix effects, pressuring gross margins.
  
• Pernod Ricard's significant reliance on volatile emerging markets, especially in China, where macroeconomic weakness, poor consumer confidence, ongoing trade restrictions, and a soft gifting culture all threaten revenue stability and make future earnings increasingly sensitive to external shocks.

Pernod Ricard Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Pernod Ricard compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Pernod Ricard's revenue will decrease by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.8% today to 16.4% in 3 years time.
• The bearish analysts expect earnings to reach €1.7 billion (and earnings per share of €6.65) by about July 2028, up from €1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 21.9x today. This future PE is lower than the current PE for the GB Beverage industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.86%, as per the Simply Wall St company report.

Pernod Ricard Future Earnings Per Share Growth

Risks

• Despite current cyclical headwinds, management projects a return to organic net sales growth of 3% to 6% per year and further margin expansion from 2027 to 2029, driven by €1 billion in additional efficiency initiatives, which could boost both revenue growth and net profit margins over the medium term.
  
• The company's exposure to dynamic emerging markets such as India, where premiumization and demographic trends (including ~25 million new adult consumers annually) continue to drive strong broad-based growth and market share gains, may provide significant top-line and earnings upside.
  
• Ongoing organizational streamlining, cost-efficiency programs, and procurement optimization have already delivered €900 million in savings since FY 2023, and the company has a clear track record and tangible plans for ongoing structural cost reductions that support resilient margins even during revenue softness.
  
• Strategic portfolio diversification both geographically (with over 55% of business outside China and the US, and resilience in Europe and other key territories) and by brand/category enables Pernod Ricard to shift resources to growth markets and brands, mitigating risk and supporting stable or growing overall revenue and earnings.
  
• Management is confidently investing in long-term cash generation and maintaining stable dividends, with normalization of CapEx and inventory investment supporting a targeted cash conversion rate of 80% or above from FY 2026 onward, which should underpin shareholder returns and support share price strength.

Valuation

• The assumed bearish price target for Pernod Ricard is €85.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Pernod Ricard's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €156.0, and the most bearish reporting a price target of just €85.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €10.2 billion, earnings will come to €1.7 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of €95.42, the bearish analyst price target of €85.0 is 12.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.