Since 2023, the alcoholic beverage industry has dramatically underperformed the consumer defensive sector as a whole. That has left many European-listed drinks stocks undervalued according to Morningstar metrics.
Weighing on the stock prices of these stocks were negative quarterly results, but above all uncertainty over US trade policy. While the US Court of International Trade ruled most of the duties imposed by the Trump administration illegal, the White House has already launched an appeal.
Cultural factors are also at work too, with long-term health trends favoring sobriety and teetotalism. “Dry January”, where people give up alcohol for a month after the excesses of the festive season, has now become established on the calendar.
US and Chinese Drinkers Are Key to Sales
According to Verushka Shetty, equity analyst at Morningstar, there are long-term factors behind the sector’s current weakness.
The consumption of alcohol, and in particular spirits, for example, is cyclical and we are currently in a downward trend after a boom during the covid period. This decline in sales in recent years has caught the market by surprise, as investors assumed that companies could maintain sales at the levels recorded during the pandemic. Another determining factor is the particular weakness of some key 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 are the ones who spend the most when they go on vacation,” says Shetty, who adds.
“Also to be considered is the decision of many US buyers to dispose of stockpiles, pending more clarity on duty policy.”
Have Consumers Turned Against Alcohol?
A key trend is that people are drinking less than in the past, says Shetty. Companies in the industry attribute this to young people’s increased focus on health and fitness and the different way they socialize with each other, in places like gyms and coffee shops rather than pubs and bars. Health regulators are also looking to intervene in the marketing of alcohol.
The World Health Organization recently proposed putting labels on all alcoholic beverages to inform consumers of the link between alcohol and cancer, as has already happened with cigarettes, and Ireland will be the first country to do so starting next year.
“Actually, the decline in alcohol consumption has been a trend for generations and is much more gradual than people think. And to see any noticeable effects on the profitability of businesses, the decline in consumption would have to be at much higher levels than at present.
“Regarding the possibility of regulation on alcohol labels, we feel we share the thoughts of many industry managers that alcohol consumption, unlike tobacco, is associated with celebratory events and sociability. Therefore, we remain optimistic that any regulations will not have a negative impact on sales,” Shetty says.
Also to be considered is the growing consumer preference for premium brands. This trend, which is already taking place in developed markets, has also spread to emerging markets as well, according to the analyst, who argues that this should support profit margins in future years.
Morningstar analysts, therefore, believe that most of these weakness factors are likely to fade over time. However, US tariffs add a great deal of short-term uncertainty. For this reason, they add, companies that are industry leaders and have a diversified portfolio in terms of products and geography should be able to withstand these current pressures.
Where Are the Undervalued Stocks in Drinks Industry?
Of the 30 stocks in the sector covered by Morningstar analysts, four have a 3-star rating, while the remaining 26 are rated 4 or 5 stars.
Davide Campari-Milano
- Fair Value Estimate: EUR 9.00
- Morningstar Rating: ★★★★★
- Economic Moat: None
- Morningstar Uncertainty Rating: Medium
First-quarter numbers showed a 4% drop in revenues compared to last year, but Morningstar analysts are convinced that the current difficulties are transitory.
“The decline in Campari sales is also due to customers relieving their inventories, who prefer not to follow up with new orders to wait for some clarity on the duties imposed by the U.S. on the import of alcoholic beverages,” says Verushka Shetty.
“We expect that duties will weaken profit margins in the short term, but the resilience of sales in the aperitif segment, down only 1 percent in the first quarter, shows that Campari has the cards to withstand the current difficulties and achieve its medium-term guidance.”
Rémy Cointreau
- Fair Value Estimate: EUR 119.00
- Morningstar Rating: ★★★★★
- Economic Moat: Narrow
- Morningstar Uncertainty Rating: Medium
Shares in Rémy Cointreau have fallen 15% since the beginning of the year and are now trading at a 60% discount to its fair value of EUR 119. The French company is, in terms of sales volume, the world’s second largest producer of cognac, accounting for 72% of sales and 90% of earnings. In the wake of the selloff produced by the announcement of US duties, the stock hit its lowest point in 10 years, around EUR 40, but analysts are confident that the company is able to meet its long-term targets.
“Management confirmed its 2025 profitability target of 21% to 22% operating margin and reiterated its 2030 targets of 72% gross margin and 33% operating margin. We believe these targets are achievable, although the uncertainty of US tariffs hangs over them,” Shetty says.
Pernod Ricard
- Fair Value Estimate: EUR 121.00
- Morningstar Rating: ★★★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Low
With a spirits portfolio of more than 240 brands, including Absolut, Beefeater, and Chivas Regal, Pernod Ricard is the world’s second-largest distiller by sales volume, behind Britain’s Diageo. The stock has lost 34% over the past 12 months in the wake of disappointing numbers during 2024, which saw a drop in sales. Shares are now trading below their fair value estimate of EUR 121.
“The company is coming to terms with weak sales in key markets such as China, Europe, and India, but management has confirmed its forecasts for 2025, which indicate a decline in revenues of less than 5 percent and a margin stably above 20%.
“These forecasts, in line with our estimates, take into account the negative effects produced by duties. Distillers often find themselves caught in the crossfire of trade wars, but industry leaders have a proven track record of successfully mitigating tariff increases. Therefore, we do not anticipate a significant long-term impact,” Shetty says.
Diageo
- Fair Value Estimate: £25.90
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Low
Diageo shares has lost more than 20% in the year to date. At around £20 per share, they are trading below the fair value estimate of £25.90. Although the third quarter numbers showed a 5.9% growth in sales (net of the effect of exchange rates), the British company’s management continues to expect profit margins to deteriorate in the second half of fiscal 2025, in line with the decline already seen in the first half.
“We expect these weaknesses to be temporary, and for the next five years we expect average earnings and revenue progress of 7.6% and 4.6%, respectively,” Shetty says.
Heineken
- Fair Value Estimate: EUR 92.00
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Medium
Although Heineken’s stock has risen 17% since the beginning of the year, the company made a loss in the past 12 months. At current market prices, the shares of the world’s second-largest brewer are trading below their fair value of EUR 92.
The first-quarter numbers reflected concerns over an economic slowdown and currency volatility.
But there were positives, especially relating to EM exposure, Shetty says: “The decline in sales volumes in the quarter was mitigated by price growth supported by the strong weight of premium brands within the portfolio. In addition, we are impressed by the expansion of the Heineken brand in developing markets, including Vietnam, China, and Nigeria, market share gains in Brazil, and sales volume growth in the Asia-Pacific region, with significant outperformance in China.”
“Despite tariff concerns, management has confirmed its forecasts for 2025, which include organic operating profit growth (net of exchange rates) of 4%-8%, and we continue to believe that Heineken has one of the strongest premium beer portfolios in the world and is well positioned to gain share in strategic markets.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
