London, Sept 18 - Pernod Ricard's warning of slower growth on Thursday dragged shares of bigger rival Diageo Plc down with it, but the British drinks firm is expected to ride out the consumer downturn better.
Both drinks groups face a test of how defensive they really are in a difficult trading environment, but Diageo's lower debt and broader-based business mean its share price premium over Pernod could widen as investors plump for safety.
Paris-based Pernod, maker of Chivas Regal whisky and Martell cognac, warned of a slow start to sales in its first-quarter of July-September and cut its target for underlying profit growth as it released full year results for the year to end-June 2008.
Pernod's debts soared to 11.9 billion euros ($17.3 billion) after it bought Absolut vodka owner Vin & Sprit for 5.6 billion euros earlier this year spooking investors nervous of a company with high debts as credit becomes more expensive.
"Clearly the debt is holding Pernod back with the extra interest set to wipe out a lot of its operating profit," said analyst David Liston at Barclays Global, adding that this makes Diageo shares more attractive at the moment.
Pernod shares lost 8.8 percent to 56.57 euros by 1430 GMT, trading around 13.4 times forecast June 2009 earnings while Diageo had a smaller fall of 4.5 percent to 963 pence to trade at 15.0 times comparable forecast current year earnings.
"We believe Pernod's high leverage and its relatively low returns put the shares at risk over the coming 12 months," said analyst Javier Gonzalez Lastra at Goldman Sachs.
Michael Bleakley at Credit Suisse says Pernod expects the ratio of net debt to its EBITDA earnings would be in the range of 4.5 to 5 times for 2010, and this compares with his forecast of 2.1 times for the Johnnie Walker and Smirnoff maker Diageo.
Other analysts highlighted the search for safety and security in current volatility on world stock markets, and were concerned over the high debt levels at the French group.
"Eventually the Absolut acquisition will prove a good deal for Pernod, but for the moment investors are looking for safe havens in such turmoil on the markets and that's why we prefer Diageo to Pernod," said one industry analyst.
The world's two biggest spirits and wines group, Diageo and Pernod, have both trimmed their underlying profit growth target for their similar financial year to June 2009 due to uncertain economic conditions.
The French group hit its target to grow underlying operating profits in the year to June 2008 by 13 percent but forecasts growth of just 8 percent for the current year. Meanwhile, Diageo also hit its target of 9 percent for the year to June 2008 and cut its forecast to 7-9 percent for the current year.
The difference was that the Pernod forecast came with the caveat that its aim of 8 percent growth was not based on a "severe deterioration in the global business environment", with most analysts saying conditions are bound to get tougher.
Pernod said it expects underlying sales to grow by a low to mid-single digit percentage in its first-quarter July-September period after growth of 9 percent in the year to June 2008.
Diageo with its relatively low debt of 6.4 billion pounds has a strong cash flow and with no immediate need for acquisitions seems better placed to withstand a downturn compared to Pernod which has been through a strong growth phase.
Pernod's high debts have built up after a period of rapid expansion as it bought the Seagram's drinks business in 2001 in combination with Diageo, while it carved up Allied Domecq with partner Fortune Brands Inc in 2005, and then finally acquired Vin & Sprit.
By contrast, Diageo has made relatively few acquisitions since it was formed from the Guinness-GrandMet merger in 1997.
It already holds dominant positions in many spirits categories as it markets the biggest selling brands for vodka, whisky, gin, liqueur and tequila in Smirnoff, Johnnie Walker, Gordon's, Baileys and Jose Cuervo.