Returning confidence boosts stock market

Shareholders have been enjoying 2010 much more than 2009 because in comparative terms the stock market is booming.

We are not back to the heady days of mid 2007 but key world indices are at their highest for 22 months, with the FTSE100 touching 5,800 and Wall Street topping 11,100 for the first time since banking’s house of cards collapsed in early summer 2008.

Share prices reflect investors’ expectations about the immediate future, so what do they reveal about the drinks sector?

The expectation is that the global producers and brand owners are starting to enjoy reviving demand. This is based partly on the notion that things cannot possibly be as bad as in the first quarter of last year, and also on the figures now being announced for the first three months of this year.

LVMH pleasantly surprised its investors when it announced a 20% recovery in wine and spirits sales in the three months to the end of March. This was the first positive growth for the division in five quarters and significantly marked the end of destocking, especially of Champagne, and a modest revival in demand from the depressed European and American markets. While the company remains cautious about the pace and solidity of the recovery, investors seem less wary; LVMH’s shares have put on more than 15% this year.

The market is waiting for other companies to reveal their first-quarter figures, but sentiment is positive. Diageo, which owns 34% of Moet Hennessy and thus benefits from its surging sales, has put on a less spectacular 7% since Christmas. There are anxieties, however, about the importance of the American market to Diageo’s profitability and the fact that the group accounts in sterling, which has been on the slide.

Doubts about the American market were highlighted by Constellation Brands’ recent figures. It made a net loss of $51 million, or 23 cents per share, in the three months to the end of February, compared with a loss of $406.8m, or $1.88 per share, a year earlier. Overall sales fell 3.5% to $708.7m. The company said it expects to earn between $1.53 per share and $1.68 per share in its current financial year, below analysts’ forecast of $1.77 per share.

Even so, despite fluctuating, especially on the news of the failed talks with Australian Vintage, Constellation’s shares have gained about 7% this year, largely because investors expect its cost savings programme to produce long-term benefits.

That is not the case at Foster’s, Australia biggest drinks group, whose shares have been flat since the New Year, due in the main to growing doubts about the future of its wine division, which remains undecided more than a year after the company conducted a strategic review.

In Europe, Davide Campari Milano’s shares were more than 10% ahead for the year in the middle March, but recent annual figures showing net sales up 7% and profits rising by 8.3% disappointed analysts, so the shares shed some ground to now stand at about 7% up on the year.

Meanwhile, helped by LVMH’s figures, Rémy Cointreau, which is expanding rapidly in Asia, has gained 19%, a performance aided by accounting in the euro, which has remained resilient so far this year.

But all eyes are now on Pernod Ricard, which has gained a respectable 8% since Christmas. It reports next week on trade in the first three months of this year. If its performance echoes the LVMH revival, shares in the sector will benefit from further confidence despite all companies continuing to warn against over-optimism in the months ahead.

Finance on Friday, 16.04.2010