Big guns predict year-end rise

The adage has it that its share price reflects investors’ expectations about how a company will perform in the next year or so.

In the main that is true, but it also reflects how the company’s board has massaged those expectations through briefings to the media and analysts.

All major companies give broad hints about their next profit statements and prudent chairmen and CEOs keep a little in their back pockets so that when the figures are announced as being somewhat better than predicted, the shares rise to reflect the “surprise”. Come in under the predictions and the reaction can be savage.

This weekend both Diageo and Pernod Ricard reach the end of their financial year 2010/11. Their results will not be announced for about two months, but what are their share prices saying about how they, and some of their competitors, have been faring in the first half of 2011?

Diageo, which has been very active as a wheeler dealer this year, has said it expects to improve on last year’s operating profits, the usual measure of assessing progress. The deals in Turkey, East Africa and China will not affect the year just closing, except in terms of sentiment, and Diageo’s own share price mirrors that. Since the turn of the year they have edged up by about 60p or roughly 5%.

In the six months to last Christmas, organic growth was 4%. Some markets, notably in developing economies, are expanding, but others, particularly in Europe and parts of North America are faring less well as the consumer feels the squeeze, so 5% growth in underlying profits would be about par, although that will only just beat the UK rate of inflation.

Analysts will be looking for a little more to keep them happy, especially if there is only a marginal increase in the final dividend. That could suggest husbanding cash for further deals ahead.

By contrast, Pernod Ricard’s shares have slipped by about 5% since Christmas, yet in May the company predicted that its organic profit growth would be “close to 7%” in the 12 months to this weekend. Why the contrast? Diageo’s balance sheet is very strong and the French group is heavily endebted following the Vin & Sprit purchase. But that debt is coming down more quickly than predicted and underlying organic growth has been stronger than at Diageo.

Since global consumer confidence hit a low in March, Pernod Ricard’s shares have been on an uptrend to mirror its heavy investment in burgeoning markets such as China, but there is an underlying anxiety that because it has ruled itself out of significant takeovers until this time next year at the earliest, the French company might compare less well with Diageo next year, when the British group’s moves to reinforce and enhance its status as the world sector leader will begin to affect the bottom line. Investors are looking beyond the guidance at both companies.

What of other drinks groups? Rémy Cointreau’s shares have moved up by nearly 8% in the past six months. It has vastly improved its profitability, sold the slower moving Champagne division but retained the brand distribution and is developing rapidly in the Far East, notably China. Investors are looking for a further surge in profitability in the next 12 months and the shares reflect that, especially as the company is looking for an earnings-enhancing deal.

Much the same is true of Groupe Davide Campari, whose shares are 17% up this year. Wild Turkey, which transformed the portfolio, is fully integrated as demonstrated in results and there is money available for another takeover when the right opportunity comes along.

On Wall Street, Brown-Forman is about 5% ahead this year on the back of at the gradual American consumer recovery, but Constellation Brands has seen its shares remain static since the year turned. While the group has taken action to improve its financial performance and cut its overheads in Australia, it remains dogged by the glut of wine Down Under and the weakness of the US dollar against its Aussie counterpart.

In Australia itself, the recently listed Treasury Wine Estates’ shares have drifted lower since it was separated from the Foster’s brewing empire in May. It has the same oversupply problems as Constellation, but although positive measures are in hand, they are taking time to work through. Nobody expects the shares to surge soon.

Finance on Friday, 01.07.2011