Targeting 80% Cash Conversion Rate From FY 2026 To Support Shareholder Returns

Key Takeaways

• Strategic investment in premiumization and geographic diversification aims to drive organic net sales growth and improve revenue.
  
• Efficiency initiatives and improved cash conversion are set to enhance operating margins, cash flow, and shareholder returns.
  
• Geopolitical and macroeconomic challenges, particularly in China and the U.S., and tariff impacts pose significant risks to Pernod Ricard's revenue stability and profitability.

Catalysts

Produces and sells wines and spirits worldwide.

• Pernod Ricard expects significant efficiencies and cost savings, amounting to approximately €1 billion over the next four years (FY 2026 to FY 2029), which will positively impact operating margins and overall earnings.
  
• By focusing on strategic investment in premiumization and geographic diversification, Pernod Ricard aims to achieve organic net sales growth of 3% to 6% annually from FY 2027 to FY 2029, positively impacting revenue.
  
• A return to growth in key markets such as the U.S. and gradually improving conditions in China are anticipated to contribute to better overall performance starting in FY 2026, influencing both revenue and earnings positively.
  
• The company is maintaining a strong focus on increasing cash conversion rates, aiming for around 80% from FY 2026 onwards, which will enhance free cash flow generation and support shareholder returns.
  
• Pernod Ricard is strategically optimizing its inventory levels and investing in its premium brands portfolio, which is expected to lead to improved market share and consumer demand, positively impacting revenue and net margins.

Pernod Ricard Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pernod Ricard's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 17.0% in 3 years time.
• Analysts expect earnings to reach €2.0 billion (and earnings per share of €8.11) by about April 2028, up from €1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.3 billion in earnings, and the most bearish expecting €1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, down from 21.5x today. This future PE is greater than the current PE for the GB Beverage industry at 17.0x.
• 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 6.0%, as per the Simply Wall St company report.

Pernod Ricard Future Earnings Per Share Growth

Risks

• Early signs suggest that the Chinese New Year will be soft, and the ongoing antidumping measures in China, particularly impacting the Duty Free regime on cognac, are expected to heavily impact Pernod Ricard's revenue in the second half of FY '25, leading to a potential low single-digit decline in organic net sales for the full year. This could affect overall revenue.
  
• There is ongoing geopolitical uncertainty and macroeconomic challenges, particularly in key markets like China and the U.S., which contribute to a negative market mix and could challenge future revenue stability and growth.
  
• Travel Retail, especially in Asia, is being adversely affected by the suspension of the Duty Free regime in China, significantly impacting Martell's performance. This could hinder revenue recovery from this channel.
  
• A negative foreign currency exchange impact of €110 million could put further pressure on Pernod Ricard’s financial results, though there is anticipation for improvement as FX becomes more favorable. This could influence net margins and earnings.
  
• There are concerns regarding the implementation of U.S. tariffs on European imports, which could pose additional financial risks by increasing costs and undermining profitability if tariffs reach an estimated €50-60 million impact, affecting net margins.

Valuation

• The analysts have a consensus price target of €117.857 for Pernod Ricard based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €164.0, and the most bearish reporting a price target of just €97.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €11.9 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 6.0%.
• Given the current share price of €93.58, the analyst price target of €117.86 is 20.6% higher.
• 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.