As Bacardi buys Patrón, here’s a stock to bet on the liquor industry’s high-end trend


U.S. investors, especially those who are bon vivants, tend to know all about Diageo, the big British drinks company behind Johnnie Walker scotch, Captain Morgan rum, and other brand-name alcoholic products.

But a smaller European spirits seller might also be worth a taste these days.

Rémy Cointreau RCO, +2.31% is a good way to play the “premiumization” trend in the liquor industry, according to the bulls. That push to embrace top-shelf spirits was underscored last week when privately held Bacardi made a foray into the premium-tequila market with its $5 billion acquisition of the maker of Patrón tequila.

The higher-end hard stuff is viewed as a bright spot for an industry grappling with declining volumes. For its part, Rémy is aiming to get 60% to 65% of its revenue from spirits priced at $50 a bottle in about two years, up from those products delivering 51% of revenue in its last fiscal year.

Shares in the producer of Rémy Martin cognac and Mount Gay rum aren’t cheap, but paying up for them makes sense, notes a JPMorgan analyst team led by Komal Dhillon. The bank has an Overweight rating on the stock and a price target of 116 euros ($145), implying a rally of 12% from its recent print around €104.

“Rémy has always traded at a premium to the European beverages sector,” Dhillon says. It’s changing hands at about 29 times estimated earnings for calendar 2019 versus its sector’s price/earnings multiple of 20, which is around midrange in terms of its historical premium, she says.

Beyond the French company’s focus on higher-end spirits, the JPMorgan team likes that Rémy has adopted a more balanced approach with its Rémy Martin Louis XIII cognac. Sales for that pricey product (miniature bottles have sold for $600) had been hit in recent years by the Chinese government’s anticorruption crackdown, which led to a drop in sponsored banquets and gift-giving. China is back to showing sales growth, but, as some analysts warn that Beijing’s antigraft efforts could continue to bite, Rémy has made changes in other markets.

“Since the clampdown on conspicuous consumption in China, the company really has taken the view that the brand [Louis XIII] should be pushed and the penetration should be higher in a lot of other markets, particularly the U.S.,” says Dhillon, who is the bank’s London-based head of European beverages equity research.

The U.S provides 29% of Rémy’s revenue, and China serves up 12%, while Japan, Germany and the United Kingdom each deliver between 4% and 6%, according to FactSet data. Annual sales were down in the fiscal years ended in March 2014 and March 2015, but they rose 8% and 4% over the next two years. They’re expected to increase 4% in the current fiscal year that wraps up in two months, and analysts forecast that sales will grow by 6% and 7% in the next two years. The company has been reducing its long-term debt as sales ramp up, Dhillon says.

“Because of all these trends at the top line, and the margin impact of high-end China growing well, you’ve got Rémy degearing quite nicely,” she says. One ratio — long-term debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda — has dropped to 1.6 from 3.4 about four years ago, according to FactSet data.

Rémy’s stock has pulled back by about 10% this month, retreating from a December all-time high near €120 and cutting the 12-month gain to 21%. The slump came as the Cognac, France-based company, which was put back in the Stoxx Europe 600 indexSXXP, +0.50% last month after a two-year absence, posted a decline in third-quarter sales. That was in large part due to China’s Lunar New Year coming a bit late in 2018, pushing gift-giving later in the year. Third-quarter trends “can be attributed to a high basis of comparison and to the late timing of the 2018 Chinese New Year,” Rémy said in a Jan. 19 statement. “Adjusted for this one-off effect, organic growth for the quarter would have been around 6%.”

The company looks on track for reasonable growth in the long run, JPMorgan’s Dhillon reckons. She gives some credit to the Hériard Dubreuil family that controls the company, whose brands also include Cointreau liqueur and Bruichladdich scotch.

“They’re making the right decisions in terms of getting 7% or so organic top-line growth and then low-teens organic EBIT growth,” the analyst says, adding that the family control is a positive because it helps foster a longer-term view.

Diageo DGE, +0.87% also scores an Overweight rating from the JPMorgan analysts, who praise the recovery in the company’s scotch business and the potential for growth in India. Diageo boasts about $17 billion in annual revenue versus Remy’s $1.4 billion.

This report first appeared at

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