Caution clouds mid-term reports

We’re half way through the year and this week London, Wall Street and the main European markets have given back most of the modest gains they have made since Christmas as investors fear that the world economy is on the edge of a second dip into recession.

Given that share prices reflect sentiment about how a company is expected to perform in the near future, how have the globe’s big drinks companies fared in the past six months? Here’s our half term report.

Without exception, every set of company results this year has been accompanied by a warning that despite the numbers being better (in most cases) than was feared, it was much too early to predict that trade was on a discernable upward path. Wise words, given that European governments are marching down the road to austerity and China is retrenching.

That caution is reflected in share price performances. In most cases, they are at about the same level as on New Year’s Day. Diageo has given up the odd percentage point, Pernod Ricard is marginally ahead and Constellation has effectively stood still. In all three cases, the shares have advanced notably from the bottom of the recessionary trough in which drinks groups were unduly hammered.

Even Foster’s has held its own, largely on the basis that it wants to sell off its Australian and US wine interests – or at least split them into a separate company. That will make the beer division attractive to rival brewers, hence the stock moving to a six-month high in early June.

The exceptions to the pattern of pedestrian share price performance so far this year are Group Davide Campari and Rémy Cointreau.

The reasons are not hard to find. Campari has absorbed Wild Turkey successfully and, as widely predicted, the addition of the bourbon to its portfolio has leveraged its range, especially in the US. Investors expect that effect to have a notable impact on the next set of results.

Meanwhile, Rémy Cointreau is benefiting from taking control of its own distribution, especially in the Far Eastern markets that have been less affected by the global downturn and have recovered more quickly from it.

This is especially true of the burgeoning Chinese market. The fact that the French group’s shares have risen by more than 20% so far this year and are standing just below their six-month high despite the general stock market downturn suggests confidence that there is more growth to come despite the generally cautious backdrop.

There is, however, a significant cloud on the horizon for all Continental producers and exporters – the plight of the euro. The recent crises in Greece, Ireland, Portugal and Spain have put the currency under heavy pressure and now most analysts predict that it will fall to parity against the dollar and will drop to about €1.30 against sterling by the middle of next year.

Sterling is also expected to weaken against the dollar – to about $1.40. The strengthening dollar will dull the profits of European producers.

Finance on Friday, 02.07.2010