The long road to recovery

In early March, the London stock market slumped to what investors hope will be its nadir of the crash.

It had fallen by almost 50% from its high in June 2007 but now in just six months the FTSE All-Share Index has risen by about a third, and after almost two weeks of continuous gains, many brokers (especially those with an interest in talking up the market) are predicting that the London market could rise for the rest of this year, taking it to within 25% of its record high.

That implies an improved general level of investor confidence. But what does it mean for shareholders in drinks enterprises? After the banks, the sector that took the heaviest pummelling during the sell-off was leisure, especially alcohol producers and retailers.

Recently a succession of the better-managed pubs groups have pointed to improving sales despite the mediocre summer, but the shares of wine and spirits companies have also turned upwards, reflecting investor hopes that the worst may be behind them.

For instance, in the early spring Diageo’s chief executive, Paul Walsh, was being extremely cautious about prospects and the group’s shares had fallen by a third from their November 2007 peak. But since March the shares have risen by almost 25% from that trough.

In April, following what were effectively three profits forecast downgrades in rapid succession, Pernod Ricard’s shares had slumped in Paris to half their 2007 peak. But they have put on 30% since then, a handsome return in less than six months for investors canny enough to move in at the bottom.

True, Pernod Ricard’s shares are still a third below their 2007 peak, but the upward trend supports the argument that logic about company fundamentals in the drinks sector was abandoned when investors sought to ditch shares last winter.

The world’s biggest luxury goods group, LVMH, has seen its shares regain more than half their losses since bottoming-out in early April, despite the 40% crash in Champagne sales this year. This factor has hurt sentiment towards Rémy Cointreau, whose shares, nevertheless, are a staggering 74% higher than in March. Even so, they are still worth less than half what they were in mid 2007.

Not all is optimism, however. On Wall Street, Constellation’s shares have shown no signs of an upsurge since the spring, while in Melbourne Foster’s shareholders have seen their stakes put on just 15% since mid April, with the market waiting for the group to reveal its long-term strategy – in particular what will happen to the troubled wine division.

The next few weeks will be crucial in determining the path of drinks companies’ shares for the rest of this year. Later this month both Fosters and Diageo report their latest figures with Pernod Ricard’s following in early September.

Analysts will comb the data for clues to underlying trends, especially how far consumers, notably in North America, have traded down this year from premium brands to commodity lines. Diageo and Pernod Ricard are expected to predict further growth in profitability, but the extent to which these growth rates are modified from the trend of recent years will affect sentiment about the entire sector.

So too will the weather pattern in the northern hemisphere this month. The “barbecue” summer has not yet appeared. A late arrival would do no harm to drinks retailers’ profitability.

Finance on Friday, 07.08.2009