RI.PA - Pernod Ricard

[jay21]

Pernod is a leading liquor produce, whose top brands include ABSOLUT, Chivas Regal, and Jameson.  It has a family controlling element with members of the Ricard family having management and board positions and a large stock position. 

 

The liquor industry is strong, with high margins and returns on capital.  Companies produce lots of free cash flow and any capital expenditures produce very high returns.  Pernod has a high developing market exposure with near 40% of sales coming from their Asia and Rest of the World segment.  This should cause sales and earnings to grow at a high rate.  There are still many markets that can be tapped such as Africa which should turn Pernod into a compounding machine.

 

The biggest risk I see with consumer good companies are bad acquisitions. Acquisitions can easily dilute the high returns of organic capital deployment because they use much more capital.  I think that the familial element of Pernod reduces this risk.  It also appears their biggest acquisitions (Vin & Spirit and Seagram's)  have done well.  I will try to dig some more into their acquisitions and post about them.

 

While the price may cause this to not clear some people's hurdles, I think it is an attractive investment with high growth rates that will cause it to compound at a satisfactory rate.

[rjstc]

That has been a long term holding for Thomas Russo and he's still adding.

[jay21]

That has been a long term holding for Thomas Russo and he's still adding.

 

I originally got interested in this looking at DEO and their competitors.  Then I saw Russo holding this and their family control/management element and really started digging.  There's 4 reasons why I like this a little more than DEO:

 

1. Family involvement

2. Higher current marketing spend

3. Focus on premiumization. DEO has some brands in the value category.

4. De-centralized operations

 

 

[Guest notorious546]

Russo still holds a large stake.

 

Any commentary on how they are to work with? Corby Distilleries a Canadian subsidiary is majority owned by them, not sure how their new contract/employment agreement compares to historical ones. Not sure who has more bargaining power in this situation. Trying to get a sense of their presence in Canada.

 

Cheers,

 

[JayGatsby]

I live in an area with a ton of craft breweries and there are a few craft distilleries. Any sense for how that's growing? I went on a tour of a whiskey distillery recently and the ROI seems unreal... make $3/gallon corn ethanol, put in barrel for 2 years, sell for $100/gallon. I'd think that would spawn copycats. The barriers to entry here are a bit higher than with beer due to regulations on making liquor at home (although apparently most states allow you to make ethanol...).  There's a big factory in Indiana that sells batch liquor to "local" distillers. It's owned by one of the larger liquor companies. I did a tasting at one local distiller who told me they're making "white whiskey" today and selling "blended whiskey" they buy elsewhere, but the long-term plan is to make their own.

 

Interesting biz. It's 95% branding, but those brands can be hugely valuable.

[jay21]

I live in an area with a ton of craft breweries and there are a few craft distilleries. Any sense for how that's growing? I went on a tour of a whiskey distillery recently and the ROI seems unreal... make $3/gallon corn ethanol, put in barrel for 2 years, sell for $100/gallon. I'd think that would spawn copycats. The barriers to entry here are a bit higher than with beer due to regulations on making liquor at home (although apparently most states allow you to make ethanol...).  There's a big factory in Indiana that sells batch liquor to "local" distillers. It's owned by one of the larger liquor companies. I did a tasting at one local distiller who told me they're making "white whiskey" today and selling "blended whiskey" they buy elsewhere, but the long-term plan is to make their own.

 

Interesting biz. It's 95% branding, but those brands can be hugely valuable.

 

Vodka is even better because they don't need to age and store etc, which makes for stronger margins. If you can convince people your vodka is super premium level, you have an incredible business.