At the moment, the alcoholic beverage industry is trading at the lows seen in the past five years, in sharp contrast to the consumer defensive sector as a whole, which is instead traveling near the highs since late February.
Stocks in the alcoholic beverage industry, globally, have lost 11 percent over the past 12 months underperforming the consumer defensive sector by nearly 20 percent.
Weighing on the stock prices of these stocks were negative quarterly results, but above all uncertainty over U.S. trade policy. In recent days, another chapter has been added to the duty saga, but it has not entirely dispelled concerns. In fact, on May 28, the U.S. Trade Court ruled most of the duties imposed by the Trump administration illegal, but the U.S. President has already said he will appeal and a long legal dispute is expected.
What is behind the sales of alcohol stocks?
According to Verushka Shetty, equity analyst at Morningstar, the factors behind the sector’s weakness are numerous, and some of them have been evident for quite some time. The consumption of alcohol, and in particular spirits, for example, is cyclical and we are currently in a downward trend after a boom during the covid period. The decline in sales in recent years has thus betrayed the expectations of the market, which instead discounted in its assessments the possibility that companies could maintain sales at the levels recorded during the pandemic. Another determining factor is the particular weakness of some key markets such as China and the U.S. “This is a problem for the industry. The U.S. is the most profitable region for many alcoholic beverage companies, and Chinese consumers are the ones who spend the most when they go on vacation,” says Shetty, who adds, “Also to be considered is the decision of many U.S. buyers to dispose of stockpiles, pending more clarity on duty policy.”
Why is the market too pessimistic?
The main concern in the market, according to Shetty, is that people are drinking less than in the past. Managers of companies in the industry attribute this negative trend to young people’s increased focus on health and fitness and the different way they socialize with each other, in places other than pubs and bars. In addition, there is concern that alcohol consumption may be penalized by new regulations. The World Health Organization (WHO) recently proposed putting labels on all alcoholic beverages to inform consumers of the link between alcohol and cancer, as has already happened with cigarettes, and Ireland will be the first country to do so starting next year. “Actually, the decline in alcohol consumption has been a trend for generations and is much more gradual than people think. And to see any noticeable effects on the profitability of businesses, the decline in consumption would have to be at much higher levels than at present. Regarding the possibility of regulation on alcohol labels, we feel we share the thoughts of many industry managers that alcohol consumption, unlike tobacco, is associated with celebratory events and sociability. Therefore, we remain optimistic that any regulations will not have a negative impact on sales,” Shetty says.
Also to be considered is the growing consumer preference for premium brands. This trend, which is already taking place in developed markets, is bound to involve emerging markets as well, according to the analyst, due to the growth of the middle class in these countries, and will have the effect of supporting companies’ profit margins.
Morningstar analysts, therefore, believe that most of these weakness factors are likely to fade over time. However, U.S. tariffs fuel uncertainty in the short term. For this reason, they add, companies that are industry leaders and have a diversified portfolio in terms of products and geography offer more assurance to investors who would like to take a position in the sector.
What are the undervalued stocks in the industry?
The alcoholic beverage producers sector, as a whole, is trading at a high discount to the fair value estimated by Morningstar analysts. Of the 30 stocks in the sector covered by Morningstar analysts, four have a three-star rating, while the remaining 26 are rated 4 or 5 stars. Below is analyst commentary on the European stocks in the sector traded at a discount to fair value.
Davide Campari-Milan CPR
- Fair Value Estimate: EUR 9.00
- Morningstar Rating: ★★★★★
- Economic Moat: None
- Morningstar Uncertainty Rating: Medium
First-quarter numbers showed a 4 percent drop in revenues compared to last year, but Morningstar analysts are convinced that the current difficulties are transitory.
“The decline in Campari sales is also due to customers relieving their inventories, who prefer not to follow up with new orders to wait for some clarity on the duties imposed by the U.S. on the import of alcoholic beverages,” says Verushka Shetty.
“We expect that duties will weaken profit margins in the short term, but the resilience of sales in the aperitif segment, down only 1 percent in the first quarter, shows that Campari has the cards to withstand the current difficulties and achieve its medium-term guidance.”
Rémy Cointreau RCO
- Fair Value Estimate: EUR 119.00
- Morningstar Rating: ★★★★★
- Economic Moat: Narrow
- Morningstar Uncertainty Rating: Medium
Rémy Cointreau has given up 19% since the beginning of the year and is now trading at a 60% discount to its fair value of EUR 119. The French company is, in terms of sales volume, the world’s second largest producer of cognac, accounting for 72% of sales and 90% of EBIT. In the wake of the selloff produced by the announcement of U.S. duties, the stock hit its lowest point in 10 years, around EUR 40, but analysts are confident that the company is able to meet its long-term targets.
“Management confirmed its 2025 profitability target of 21 percent to 22 percent operating margin and reiterated its 2030 targets of 72 percent gross margin and 33 percent operating margin. We believe these targets are achievable, although the uncertainty of U.S. tariffs looms over them,” Shetty wrote in a report dated April 30, 2025.
Pernod Ricard RI
- Fair Value Estimate: EUR 121.00
- Morningstar Rating: ★★★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Low
With a spirits portfolio of more than 240 brands, including Absolut, Beefeater, and Chivas Regal, Pernod Ricard is the world’s second-largest distiller by sales volume, behind Britain’s Diageo. The stock has given up 34 percent over the past 12 months in the wake of disappointing numbers during 2024, which closed with a 4 percent drop in sales, and is now trading at a 25 percent discount to its fair value of EUR 121.
“The company is coming to terms with weak sales in key markets such as China, Europe, and India, but management has confirmed its forecasts for 2025, which indicate a decline in revenues of less than 5 percent and a margin stably above 20 percent. These forecasts, in line with our estimates, take into account the negative effects produced by duties. Distillers often find themselves caught in the crossfire of trade wars, but industry leaders have a proven track record of successfully mitigating tariff increases. Therefore, we do not anticipate a significant long-term impact,” Shetty says.
Diageo DGE
- Fair Value Estimate: GBX 2590.00
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Low
Diageo has lost more than 20 percent in the past 12 months, falling below GBX 2,000 for the first time in the past five years, and is now trading at a 23 percent discount to its fair value of GBX 2,590.
Although the third quarter numbers showed a 5.9 percent growth in sales (net of the effect of exchange rates), the British company’s management continues to expect profit margins to deteriorate in the second half of fiscal 2025, in line with the decline already seen in the first half.
“We expect these weaknesses to be temporary, and for the next five years we expect average earnings and revenue progress of 7.6 percent and 4.6 percent, respectively,” Shetty says.
Heineken HEIA
- Fair Value Estimate: EUR 92.00
- Morningstar Rating: ★★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Medium
Although Heineken’s stock has risen 12 percent since the beginning of the year, the balance sheet for the past 12 months still shows a 17 percent loss. At current market prices, therefore, the shares of the world’s second-largest brewer are discounted by about 20 percent from their fair value of EUR 92.
The first-quarter numbers, while confirming analysts’ concerns about negative sales effects related to the recession and currency volatility, provided interesting insights that lend support to their positive view on the stock: “Sales per hectoliter rose 3.3 percent year-over-year, the decline in sales volumes in the quarter was mitigated by price growth supported by the strong weight of premium brands within the portfolio. In addition, we are impressed by the expansion of the Heineken brand in developing markets, including Vietnam, China, and Nigeria, market share gains in Brazil, and sales volume growth in the Asia-Pacific region, with significant outperformance in China,” Shetty says.
“Despite tariff concerns, management has confirmed its forecasts for 2025, which include organic operating profit growth (net of exchange rates) of 4%-8%, and we continue to believe that Heineken has one of the strongest premium beer portfolios in the world and is well positioned to gain share in strategic markets.”
