Falling Alcohol Consumption And Rising Costs Will Undermine Value

Key Takeaways

• Long-term declines in alcohol consumption and rising compliance costs threaten demand, profitability, and market access for Campari's main brands.
  
• Market shifts toward craft spirits and reliance on key brands increase earnings volatility and erode pricing power amid rising costs and supply chain disruptions.
  
• Strong brand investments, portfolio optimization, and expansion into premium and health-oriented segments drive sustained growth, profitability, and financial resilience against sector challenges.

Catalysts

Davide Campari-Milano N.V., together with its subsidiaries, markets and distributes alcoholic and non-alcoholic beverages in the Americas, the Middle East, Africa, Europe, and the Asia-Pacific.

• Secular declines in alcohol consumption, particularly among younger and health-conscious demographics, are likely to intensify over the coming years. This could structurally erode demand for Campari's core brands in mature and emerging markets alike, resulting in sustained headwinds for top line revenues.
  
• Heightened regulatory risk regarding alcohol advertising, labeling, and increased taxation is poised to further restrict market access and inflate compliance costs. Such developments would directly compress profitability, as higher SG&A and lower net margins become entrenched in the company's cost structure.
  
• The accelerating global shift towards premium, small-batch, craft, and local spirits risks undermining the market share and pricing power of Campari's flagship brands. This competitive erosion may challenge Campari's ability to defend volumes and maintain gross margins, especially in key European and American markets.
  
• Campari's persistent dependency on a handful of flagship brands such as Aperol and Campari liqueur has not diminished. This lack of internal diversification increases earnings volatility and magnifies the impact of any sudden shifts in consumer preferences or negative publicity, potentially destabilizing future revenue and EPS growth.
  
• Rising input costs and recurring supply chain disruptions-including the threat of tariffs and logistics bottlenecks-are already forecasted to offset operational leverage gains. These will likely drive further margin compression, as Campari's ability to fully pass on these costs to consumers faces mounting resistance, ultimately dampening earnings and free cash flow conversion.

Davide Campari-Milano Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Davide Campari-Milano compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Davide Campari-Milano's revenue will grow by 2.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.1% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach €380.3 million (and earnings per share of €0.38) by about August 2028, up from €188.3 million 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 17.4x on those 2028 earnings, down from 42.3x today. This future PE is lower than the current PE for the GB Beverage industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.83%, as per the Simply Wall St company report.

Davide Campari-Milano Future Earnings Per Share Growth

Risks

• The company is consistently outperforming sector peers across multiple key markets, demonstrating strong sell-out performance and double-digit growth in over 13 countries, which supports continued revenue expansion and market share gains.
  
• Significant investments in brand building, especially in global campaigns for brands like Aperol and activations across Europe and the US, show increasing consumer traction, supporting brand equity and pricing power, and thus sustaining future revenue and profitability.
  
• Portfolio streamlining and targeted disposals of low-margin assets are resulting in a higher-quality, more profitable business mix, contributing to improving EBIT margins and supporting long-term earnings growth.
  
• Strategic expansion into new growth channels and regions, alongside robust performance in non-alcoholic and convenience segments like Crodino and Aperol Spritz RTD, position the company to benefit from the accelerating shift toward premium, craft, and health-conscious consumption trends, leading to diversified revenue streams.
  
• Operational efficiency gains, including SG&A deceleration and supply chain optimization, together with positive free cash flow and a deleveraging balance sheet, provide financial flexibility to navigate cyclical pressures and support sustainable long-term earnings growth.

Valuation

• The assumed bearish price target for Davide Campari-Milano is €4.28, which represents two standard deviations below the consensus price target of €6.76. This valuation is based on what can be assumed as the expectations of Davide Campari-Milano'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 €10.0, and the most bearish reporting a price target of just €4.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.3 billion, earnings will come to €380.3 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of €6.63, the bearish analyst price target of €4.28 is 54.8% 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.