PAIRS TRADE IDEA: Absolut Boycott - How much alpha is there in an (attempted) consumer boycott?
(Long Diageo : Short Pernod Ricard)
Pernod Ricard (RI) has resumed export to Russia causing widespread protests and calls for a boycott of its brands including Absolut Vodka, Ballantine's, Chivas Regal, Jameson and Beefeater.
The resumption of exports is motivated with concern for local workers.
SHORT PERNOD RICARD
❌ Now comments encouraging consumers to boycott are spreding across social media, with some big-name restaurateurs lending their support.
❌ Before the war, Russia accounted for around 7% of RI's total sales. All that is not likely to return on day one.
Sure there's some pent-up demand. But the Russian consumer is likely weak (although the Rouble has had a surprising development in the past year).
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❌ Depending on how much momentum this sought-after boycott manages to build, sales of the aforementioned brands are likely to suffer. But how much is hard to say.
Pernod Rickard is a +50 BN EUR market cap company. So it might not move the needle much.
BUT, in consumer products incremental margin is an important concept. A large part of the cost base relates to marketing (22% of OPEX), fixed production cost and structure, rather than per unit costs, meaning that a slight slowdown in sales can impact profitability hard.
❌ RI will also likely to suffer some ESG-related blowback.
LONG DIAGEO
On the other hand RI's main competitor Diageo (DEO) with brands such as Smirnoff, Johnnie Walker, Guinness, Baileys and J&B, announced it would pull out of Russia shortly after the outbreak of the war and has not returned to Russia yet.
✅ DEO has posted robust sales growth (+18%), an organic operating margin expansion, productivity savings and a favorable currency impact that aided first-half fiscal 2023 results.
Price/mix has gained from a positive mix due to the robust growth in super-premium-plus brands, particularly Scotch, Tequila and Chinese white spirits.
✅ DEO’s margin trend is favorable thanks to premiumization efforts, pricing actions and supply productivity savings, which mostly offset the cost inflation.
✅ DEO management also posted an optimistic outlook for the medium to long term.
✅ Concerns about inflationary pressure, weaker consumer spending, and increased freight costs are neutral in this pairs trade.
✅ Also, Buffet enthusiasts would be encouraged by the fact that DEO is (a very small) part of Berkshire Hathaway's portfolio.
The RI share now trades at 16.2x EV/EBITDA '23e similar to DEO at 16.7x '23e and sector average at 12x. Now RI is up 6% in the past 12 months, and DEO down 11% in the past year.
Remind me to revisit this trade in 6-12 months.
Lastly, in this idea you can affect the outcome, in a very small but meaningful way. 🍸😎
Any thoughts on this?
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