In this report, Sanjeet Aujla assumes primary coverage of Diageo and Pernod Ricard, providing a review of US craft spirits and its potential impact on the major players. We maintain our Outperform rating (€124 TP) for Pernod and our Neutral rating (1,800p TP) for Diageo.
We estimate craft spirits could reach 12% share over the next decade. Assuming super and ultra-premium brands replicate historical growth, this implies volume declines for premium and value brands.
Prefer Pernod over DGE: Whilst both companies could participate more in the craft segment, we believe they will likely see lower overall growth and share losses, as they are overindexed to large premium and value brands.
We believe DGE is most exposed, as i) it generates c40% of EBIT from the US v c25% for Pernod, ii) it has taken too much price on its large 'premium' brands in recent years, and iii) Pernod has more consistent growth in its
whiskey portfolio, a category with higher 'craft credentials'. The bear case is DGE could see limited profit growth in the US v c8% CAGR over the past decade (which has driven over 50% of group profit growth). Pernod trades at a 7% calendarised FY16E P/E discount to DGE, unjustified in our view.