European beverage and consumer staple companies could do well in the event of a recession.
But analysts warn that the medium-term outlooks for large-cap companies particularly in the drinks space are mystifyingly optimistic when past performance is considered.
Pernod Ricard and AB inBev remain stock-picker favourites, while drinks companies like Diageo PLC (LSE:DGE) and Campari have split opinion, and others such as Heineken are expected to underperform.
Analysts are buoyant on Pernod, where a re-rating could be on the cards, according to Citi. Citi brokers have recommended Pernod as a Buy on a target price of €223, after it raised its profit guidance for the year in June. Its shares are currently trading at €169.85.
AB inBev is also expected to outperform the market.
Of three top-performing large-caps highlighted in an analyst note published by RBC Group this morning (alongside Imperial Brands and Reckitt), the drinks company has the largest price target of the three, where its analysts believe it would achieve fair value, at around £70.
AB inBev “enjoys a strong, and underappreciated, competitive position”, with geographic diversity shielding it to some degree from economic uncertainty, analysts said.
However, it is also highly leveraged, with only 93% of its debt priced at fixed rates.
Meanwhile, Diageo is expected to have a “robust end” to 2022, supported by share buybacks, Citi analysts said.
In May, the company announced that an uptick in its guidance would allow it to carry out a £4.5bn share buyback programme.
The investment bank has set a neutral rating for Diageo on a price target where it feels the stock would represent fair value of £41.50.
Not everyone is convinced.
Diageo is a conundrum for stock investors because it has underperformed against wider staples in the market and investors have concerns about its ability to continue to sell into China.
RBC expects Diageo to underperform the market and has set a low price target of £28 per share. This is lower than the drinks company's current share price of 3,526p.
Citi analysts said Diageo's “near-term downside is likely to be limited by the on-going share buyback programme”.
RBC conceded that Diageo “has one of the best recent revenue and profit growth trajectories since 2017, putting it firmly within the guidance range of 5-7% organic revenue growth and 6-9% EBIT growth.” According to its analysts, Diageo and Pernod have both outperformed the lower end of their earnings guidance since 2017, the same could be said for sales.
However, its analysts believe the beverage maker has benefited from an unforeseen upsurge in North American demand during Covid-19.
“We do not expect that to recur,” analysts said.
Now let’s look at Heineken.
Heineken, Diageo and Beiersdorf are all expected to underperform the market, according to analysts at RBC.
Its analysts pointed to a vague outlook for the medium term. They said the beer brand suffers from a lack of “abundance of dominant market positions” that make AB inBev so formidable by comparison.
Heineken’s earnings growth since 2017 has fallen behind medium-term projections, and the same is true for Carlsberg when looking at sales growth, according to RBC.
“Heineken sells a lot of beer in a lot of places but its relatively weak competitive position means that in our view Heineken is going to struggle to achieve consistent profit growth,” analysts said.
Analysts raised doubts as to whether many of the big-cap European consumer staples companies will achieve their guidance.
For most large-cap companies, achieving medium-term guidance for organic sales and profit growth will require a “step up” relative to the recent past, they warned.
“Given the uncertain outlook for the economy as a whole, and consumer spending in particular, this looks very ambitious to us,” RBC said in an analyst note today.
Now let’s look at Campari.
It does not bother with medium-term guidance.
Campari is among the “most highly rated of the large cap companies we follow”, RBC said in analyst note today.
“While it’s true that L'Oréal, Campari, AB InBev and Heineken don’t have explicit quantitative sales growth guidance, everyone else has either snuck in at the bottom of the current guidance range (Nestlé, Unilever)
or failed to get anywhere near it (Danone, Reckitt, Henkel, Beiersdorf, Carlsberg and Imperial Brands)," RBC said. "While many of these businesses are under new management with new approaches and ambitions, we regard this as a sensible reminder of what we said earlier: guidance is no substitute for delivery.”