Can AI Match Sell-Side Analysts? Testing OpenAI’s Deep Research
I put OpenAI’s Deep Research to the test—can it produce institutional-grade sell-side reports, or is it just repackaging consensus? Here’s what I found.
Can AI match the human sell-side1 analysts output? I tested OpenAI’s Deep Research to find out. The result? AI can replicate "average" sell-side reports but lacks proprietary insights, making it more of a tool than a replacement. This experiment highlights AI’s strengths, its surprising mistakes, and what it means for the future of investment research.
Key Takeaways from This Experiment
Before diving into this in-depth exploration of OpenAI’s Deep Research, here are the most surprising insights from this thought experiment:
AI Can Replicate Average Sell-Side Research, But Not Top Analysts – OpenAI’s Deep Research generates well-structured institutional reports that match the quality of “average” sell-side research, but it lacks original insights and non-consensus thinking. AI can replicate it mainly by summarizing past data and consensus2 views.
Speed vs. Substance Tradeoff – AI produced a 10,000-word investment report in just 7 minutes—far faster than any human—but some critical errors in valuation and outdated data show the necessity of human-in-the-loop oversight.
Sell-Side Research’s Business Model May Shift – AI’s ability to generate “desk research” efficiently could challenge firms that lack platform advantages or star analysts, while enhancing firms that integrate AI effectively. The article discusses my take on this with suggestions for practical applications.
The Real Value Lies in Collaboration, Not Replacement – The most significant opportunity for sell-side analysts isn’t fighting AI but learning how to leverage it to automate routine tasks and focus on deep, differentiated analysis. The machines can unlock potential that we are currently held back due to the huge time it takes to do even “average” sell-side research. I thought back to my own experience as a sell-side analyst, working deep into the night to create research worthy of a top ranking. I wonder what I could have achieved if I had more time for next level analytics and how a tool like this could have made it possible.
AI’s Decision-Making Feels Strangely Human – The AI even “changed its mind” mid-experiment, adjusting a stock rating based on restructured prompts—demonstrating how prompt refinement impacts AI reasoning.
AI Won’t Replace Analysts, But It Can Reshape Sell-Side Research
AI is a powerful tool that can automate time-consuming research tasks, but it does not generate original, non-consensus insights—the hallmark of top-ranked sell-side analysts. What this means for the industry:
For top analysts: AI can free up time for deeper research but won’t replace the best minds.
For the sell-side model: Sell-side firms that focus on their platform strength and/or their star analyst power have the potential to leverage AI to expand their competitive advantage. For firms creating "average" research, AI could disrupt consensus-driven analysis. The value proposition should shift toward original insights and proprietary data, not just information gathering, which can be handled by AI.
For knowledge workers in general: AI isn’t a threat—unless you ignore it. Learning to integrate AI into research will be a key competitive advantage.
These findings shape the broader question: Is AI a collaborator or competitor to sell-side analysts? Read on for the full experiment, evaluation, and industry implications.
The very long-form article includes the following sections:
The Catalyst for the Experiment
How the experiment is run
Assessment of the first version of the AI generated report, including the unedited text created by OpenAI Deep Research
A second attempt to improve the report, with a big issue
The third final attempt with commentary, and the unedited text created by Open AI Deep Research
Implications for the industry
Dall-E: A visually striking hero image depicting the concept of AI versus human analysts in investment research. The image features a sleek, futuristic AI interface on one side, processing financial charts and data, while on the other side, a professional sell-side analyst is intensely reviewing stock reports, making critical investment decisions. The background blends shades of purple, navy, and grey, giving it a modern and sophisticated look. The composition symbolizes AI as a tool rather than a replacement, with subtle elements indicating collaboration, such as data streams flowing between the AI and the human analyst.
***Disclaimer: The report generated by OpenAI Deep Research is definitely NOT investment research and should NOT be relied on for any investment decisions. This is a thought experiment to see how OpenAI’s Deep Research would stack up compared to real sell-side investment research.***
Welcome to the Data Score newsletter, composed by DataChorus LLC. The newsletter is your go-to source for insights into the world of data-driven decision-making. Whether you're an insight seeker, a unique data company, a software-as-a-service provider, or an investor, this newsletter is for you. I'm Jason DeRise, a seasoned expert in the field of data-driven insights. I was at the forefront of pioneering new ways to generate actionable insights from alternative data. Before that, I successfully built a sell-side equity research franchise based on proprietary data and non-consensus insights. I’ve remained active in the intersection of data, technology, and financial insights. Through my extensive experience as a purchaser and creator of data, I have gained a unique perspective, which I am sharing through the newsletter.
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This content is free and featured in our AI Integration section. The content is meant to explore possibilities with case studies, is open for feedback and hopefully encourages more experimentation.
The catalyst: Open AI’s Deep Research Demo
In OpenAI’s words, it’s Deep Research Product is “an agent that uses reasoning to synthesize large amounts of online information and complete multi-step research tasks for you. Available to Pro users today, Plus and Team next.” Link to product launch announcement
Open AI on how it works “Deep research was trained using end-to-end reinforcement learning on hard browsing and reasoning tasks across a range of domains. Through that training, it learned to plan and execute a multi-step trajectory to find the data it needs, backtracking and reacting to real-time information where necessary. The model is also able to browse over user uploaded files, plot and iterate on graphs using the python tool, embed both generated graphs and images from websites in its responses, and cite specific sentences or passages from its sources. As a result of this training, it reaches new highs on a number of public evaluations focused on real-world problems.”
Deep Research has limitations. In OpenAI’s own words: “Deep research unlocks significant new capabilities, but it’s still early and has limitations. It can sometimes hallucinate facts in responses or make incorrect inferences, though at a notably lower rate than existing ChatGPT models, according to internal evaluations. It may struggle with distinguishing authoritative information from rumors, and currently shows weakness in confidence calibration, often failing to convey uncertainty accurately. At launch, there may be minor formatting errors in reports and citations, and tasks may take longer to kick off. We expect all these issues to quickly improve with more usage and time.”
For years, predictions of the sell-side’s demise have proven exaggerated. Could AI be the real disruptor?
After watching OpenAI’s Deep Research demo, my initial reaction was that it could replicate what at least half of sell-side analysts do: summarize facts and align with consensus opinions, rather than add new insights.
However, not all sell-side research lacks value. When I covered Walmart, one of the largest companies in the world by market cap at the time I covered it, there were ~40 other publishing sell-side analysts who covered the company. There were 20–25% who wrote thoughtful, non-consensus research on the company that advanced the market’s thinking and helped institutional investors make better decisions. The rest seemingly just went through the motions of the quarterly earnings cycle, updating estimates that were very close to consensus and reiterated the known positives and negatives that the company has talked about in public forums. Producing this type of research does still require significant effort from analysts and their teams to gather, organize, and analyze data. However, research that aligns too closely with consensus does little to advance key market debates or enhance institutional decision-making. This kind of sell-side research makes up the vast majority of the consensus estimates. Analysts with a neutral view typically have estimates in line with the consensus and describe the current positive and negative facts as offsetting. The “average” bullish sell-side analyst tends to choose a forecast that is purposefully slightly above consensus, emphasizing positives while claoming risks are already reflected in the stock’s price.
To evaluate Deep Research firsthand, I upgraded to ChatGPT Pro for $200 and tested its capabilities for this Data Score Newsletter experiment. Can OpenAI’s Deep Research meet the standard of an “average” sell-side research report?
Understanding the Sell-Side Business Model
AI’s ability to compete with sell-side analysts raises fresh concerns about the industry’s future viability. Yet, demand remains strong for high-quality, proprietary insights from top-tier sell-side analysts. There is also a lot of not-so-valuable sell-side research available, in my opinion. It’s important to understand the business of the sell-side to understand why there could be a wide range of quality across the sell-side. It’s also important to note that even “average” sell-side research is hard to do.
First, let’s clarify the role of a sell-side analyst and the factors that distinguish top performers. Let’s also talk about the economics behind the competition of sell-side analysts: It’s important to understand how sell-side research firms compete and generate revenue. We need to talk about soft dollar commissions, MIFID (Markets in Financial Instruments Directive), broker votes, and rankings from institutional Investor/Extel surveys.
Sell-side research analyst role: The sell-side analyst published research on their coverage, which is typically a sector and geography, which would include anywhere from 5 to 20 names depending on the sell-side research department’s business model. While they are not actually investing money, they are writing research for institutional investors (and sometimes repurposed for retail investors) to help them make better investment decisions.
How sell-side equity research generates revenue and profit: Research is a service that is paid for by the buy-side. There are two primary mechanisms for payment.
Soft dollar commissions—In the US, to avoid conflicts of interest at broker dealers, research is not allowed to be directly paid far. Instead, the research is a service added to the trade execution and other services provided. To compensate the firm for research, soft dollar commissions are used such that if the client values the research, they will execute more trades with the firm.
MIFID/subscription-based: In Europe, the view is that research should be paid for separately from execution and that the institutional investors have a fiduciary duty to pay for the best execution of their trades separately from the research costs. The goal is to increase the transparency of costs to the end clients of the mutual funds, hedge funds, and pensions (i.e., retail investors). Independent research firms, unaffiliated with broker-dealers, operate on a subscription-based revenue model.
Sell-side rankings via Institutional Investor/Extel: There are 3rd party surveys of the quality of the analysts in each sector, voted on by the buyside. This creates the rankings. Regardless of the payment model, the top three ranked analysts in each sector dominate market share and drive the firm's profitability.
The implication is that there is a decay curve in profitability where the top-rated analysts generate the vast majority of the revenue and profitability amongst the competing analysts. It’s also a self-fulfilling paradigm, where the buy-side investors need to talk with the top-rated analysts and read their research because they are influencing their buy-side competitors. Also, buy-side investors who are new to a sector or company and need to get ramped up quickly in their knowledge typically choose to call the top-rated analysts to get advice.
To understand how AI might reshape sell-side research, we need to first examine what makes a research firm successful. The competitive landscape follows a simple 2x2 framework. The dynamic is across the dimensions of platform strength and star analyst strength.
Both Star Analysts and Platform: These are firms that have the breadth and depth of coverage, powered by platforms that allow their analysts to focus on their differentiated value-added work. These firms are also willing to pay for star analysts who can command materially higher compensation than the average analyst. This approach creates a moat because the investments are hard to replicate by others but only work if they maintain their high market share.
Platform Strength, Only: This approach focuses on establishing a platform that allows up-and-coming analysts to rapidly accelerate their impact on the market through technology-driven decisions. Not only does technology help provide analytic insights and proprietary data points, but the platform also helps make it easier to run the business, optimize the analyst’s client-facing time, and focus efforts on high ROI activities. It also provides firm protection if analysts depart for their next opportunity; the proprietary information is institutionalized and available for the next analyst in the seat. The focus on the investments is on the technology platform more so than paying for star analysts.
Star Analyst Strength, Only: This approach focuses on paying for analysts that are top 3 ranked in each sector that the firm competes in. These top ranked analysts command the majority of the market share of the sector’s research dollars. Firms have to pay highly for the analysts because they can be bid away by competitors who are also following a star analyst strategy. These firms prioritize human capital investments over technology. That’s not to say there is no investing in technology (just like in the platform strength only category, they do invest in human capital); it’s just that they choose to differentiate themselves versus competition based on the human capital investments. The risk is that when star analysts leave or retire, their institutional knowledge isn’t easily transferable, forcing successors to rebuild coverage from scratch. Star analyst churn can lead to extended periods of under-coverage of sectors. Also, due to the limited platform investments, it’s harder for star analysts to cover many companies well, so coverage tends to be limited.
Neither Platform nor Star Analyst Strength: It would be hard to find a research firm that would admit this. However, there are sell-side research firms that have limited platform investments and do not pay to retain the top 3 analysts. The analysts at these platforms are self-made success stories and are likely poached by other platforms who would either pay for the analyst potential as a star analyst or the analyst is attracted to the opportunity because the platform enables their future success. These firms aren’t actually competing to win in research. Because institutional-grade research, even if it’s average quality, is still very hard to do, it’s a valuable add-on service to the business’s other services.
The majority of individual sell-side research analysts in part because of their firms’ business model fall into the “lower left” box because research is not the service they are primarily competing on. It could be that it’s an additional service for retail/wealth advisory clients. It could be that by providing research, it enables other services like corporate access3 and provides visibility for the firm's overall marketing. Maybe there’s other reasons. I’ve only worked at sell-side firms that valued star analysts and/or built a platform that enabled young, high-potential analysts to thrive. The point is, it shouldn’t be a surprise that there is a lot of consensus-hugging, non-special published research. And there is definitely a consumer for that type of research.
Even producing “average” sell-side research is no small task
The people doing the work have to put in massive hours to gather facts, build financial models, write research reports, and verify accuracy. They leverage years as an associate, where they learn the craft as an apprentice. They build on academic study, many at prestigious universities. Even the average sell-side analyst is well paid compared to other professions. It’s no small task to be able to generate average sell-side research from AI.
An analogy: In professional sports, even the average player is highly skilled, yet they fall far short of the star performers. The same applies to sell-side analysts. The equivalent example would be if we built a robot that could do the job of an average player in a professional sport. That would be an exceptional milestone in the advancement of AI and robotics.
Is AI a Threat or a Tool for Sell-Side Analysts?
With the advancements in Generative AI’s ability to apply some reasoning logic with RAG pipelines4 that bring in relevant real-time information, it’s possible the “average” sell-side analyst has a new competitor. Or rather, it could be a new collaborator for star analysts or an enhancement to the platform-driven sell-side research.
The ability of AI even in its current state is not going to be the best AI we see in our lives. It’s important that everyone who is a knowledge worker begins to learn how to use AI collaboratively today. By far, that’s the most important thing to take away from this experiment. Can we shed the basic time-consuming nature of knowledge worker roles by collaborating with AI and reach new levels of creativity and insights?
The bullish view is that generative AI becomes an enabler of the sell-side to reduce the time it takes to do basic desk research and free the analysts to spend more time on the deeper analytics that advance the market’s understanding of the key investment debates. It can also be an enabler for the star analysts or become part of the platforms that are an enabler analyst’s success.
Let’s test out that machine’s ability to compete as an average “player on the field”.
Running the Experiment
I will share my prompts and the response of ChatGPT o3-mini Deep Research as I go through the test of the capabilities. I want to make sure I’m challenging the machine to do research that would be value-add, but I also don't want to focus on too many computational activities. That could be a different AI agent to build the model and run the valuation. Nevertheless, I do need to reference those concepts of modeling financials and valuation; otherwise, I can’t truly test if OpenAI’s Deep Research is a new competitor.
Research Challenge: European Beverages Sector with a focus on Diageo and Pernod Ricard
Why I Chose This Test
I chose a sector I previously covered as a sell-side analyst: European Beverages. I was a senior associate at Sanford Bernstein and then a senior sell-side analyst at UBS covering this sector between the years 2006 and 2011, with a brief reprise of the role in 2015. While I no longer cover it, I have stayed aware of the key debates and trends, making it an ideal test for me to assess if AI can match an “average” sell-side analyst.
The European Beverages sector is predominantly made up of beverage alcohol companies like Pernod Ricard, Diageo and Heineken. Diageo and Pernod Ricard, both global businesses with complex product lines, are covered by approximately 20 sell-side analysts. I chose this sector as a starting point because the ~20 analysts’ coverage would mean there is less analytical content available across the web available to OpenAI. Also, because these are European-listed companies, they may limit the available content. These global companies operate across multiple regions and manage diverse brand portfolios that drive overall results. The industry faces significant challenges today, creating both upside and downside scenarios for typical sell-side research. So, this is quite a complex task for Open AI’s Deep Research to meet the standard of “average” sell-side research.
Testing AI vs. the Sell-Side: Can OpenAI Match Average Analysts?
Prompt 1:You are a senior equity sell-side research analyst at an investment bank covering the European beverage sector and need to initiate coverage of Diageo and Pernod Ricard. Create a research report that covers the relevant industry dynamics that are headwinds and tailwinds, company-specific challenges and opportunities, determine the likely revenue and profit growth of each company over the next 5 years, including an assessment if consensus estimates in the next 12 months are too high or too low. Generate a valuation of the companies and compare it to the current share price. Leverage company results, company commentary, alcohol industry trade magazines, general news, financial services data, and retail investor commentary to generate the research report. Assign a buy, neutral, or sell rating. The goal is to be right on the investment recommendation on a 12-month view. Structure the research report in a pyramid principle format. Include supporting data points with each stated opinion.
🤖ChatGPT o3-Mini Deep Research: To ensure a comprehensive research report on Diageo and Pernod Ricard, could you provide additional details on:
Geographic Focus: Should the analysis focus on European operations, global performance, or specific regions?
Valuation Metrics: Are there specific valuation models you prefer (DCF, EV/EBITDA5, P/E6 multiples, etc.)?
Peer Comparison: Should we compare these companies to a defined peer set, and if so, which peers should be included?
Macroeconomic Assumptions: Any particular macroeconomic scenarios to incorporate (e.g., interest rate trends, FX assumptions, inflation impact)?
Investor Profile: Should the report cater to institutional investors, retail investors, or a mixed audience?
Let me know these preferences so I can tailor the research accordingly.
Prompt 2:Great questions. 1. Geographic focus: They are global companies, so think about breaking down the analysis by North America, Europe, China and the rest of the world. Both companies have different geographic and product exposures. This should be considered in the analysis and research.
2. Let's think about P/E multiples, especially relative to their own history, relative to each other and relative to the overall beverage industry multiples.
3. Peer comparison should include Campari, Remy Cointreau, Heineken, AB-InBev, and Carlsberg.
4. Macro assumptions: consider the current macroeconomic trends continuing but then explore scenarios where the global and local economies deteriorate and a scenario where they improve from here.
5. The report should cater to institutional investors only. Do you have any other questions before you begin the research?
It didn’t ask any additional follow-up questions. It gave me this response:
🤖ChatGPT o3-Mini Deep Research: Understood. I will conduct an in-depth analysis of Diageo and Pernod Ricard, covering global industry dynamics, company-specific strengths and risks, revenue and profit forecasts, and valuation metrics. The analysis will break down by key geographic regions—North America, Europe, China, and Rest of World—considering the companies’ respective exposures.
I will assess whether consensus estimates for the next 12 months are too high or too low, conduct a valuation comparison using P/E multiples relative to history, peers, and the overall beverage sector, and include sensitivity analysis based on macroeconomic scenarios. The research will also incorporate a peer comparison with Campari, Remy Cointreau, Heineken, AB-InBev, and Carlsberg.
I will return with the full research report once the analysis is complete.
It began listing which sources it was reviewing. I began typing the introduction to this report, expecting it to take an hour. 7 minutes and 30 sources later, it had generated its full report.
My first reaction to Open AI’s Deep Research output
My first reaction? Wow! In 7 minutes, OpenAI produced a convincing 10,000-word institutional-grade research report—faster than I could draft the introduction to this article.
As I read through the report, I thought about the countless late nights, writing institutional-investor-grade research on these companies. The countless hours combing through the details of each company press release, notes from conversations with company management, and the various industry data new sources. I thought about those late nights when I would look over the balcony to the empty trading floor, which was empty, knowing I had to have valuable insights and data points to back up the views I was about to publish in the morning to our clients. And I knew that both our sales force and our clients would judge if I had actually added value through my report. The countless cups of coffee and the Metallica songs blasting in my headphones to keep me motivated to keep digging in deep to keep pushing for the best possible research report I could write. I thought about the competitors, mostly the ones who were top of the Institutional Investor and Extel rankings, but also the average analysts. Would the report I was working on be seen as top-tier or average? I needed to dig in deeper, put more hours in—my research had to add the most value.
What deeper insights and better analysis could I have generated if I had more time for value-added work instead of spending many hours each day gathering data and organizing it in a written report?
I think I know what Rick Rubin was talking about when he said he cried when he learned that AI had beat the master champion Go player with a “creative” move that no human ever would have done. Legendary music producer Rick Rubin said he felt motivated that AI could help unlock more potential in humans because it doesn’t have the “expert” baggage we bring to creativity and brings none of the social norms to the creative problem solving. He shared this story in his book “The Creative Act” and discussed it on a few podcasts; here’s one example.
Rubin: And the announcers who were the expert announcers were like, “Oh, the computer, it screwed up. It doesn’t know what it’s doing. It can’t be that, that’s a wrong move.” And then eventually the Grandmaster comes back, they finish the game, and the computer wins the game. And I hear this story and I realize that I’m crying. And I don’t understand what’s going on. I don’t know, why am I crying? Am I crying — The surface answer would be, “Oh, the machine has conquered man and we’re all in trouble.” It’s doomsday, right? That would be one…
Tippett: Right. No, I want to say, I was going to ask you about this cause it was a stunning thing to read.
Rubin: Yes. But I didn’t have that feeling at all. That’s not what it was. So I’m crying. It’s like, well I don’t care if the machine wins or man wins. Why am I having an emotional reaction? What’s going on? And I thought about it for, I think I realized what it was on the same day, but it was hours later. I was thinking about it for hours. Where is the emotion in this for me? Where’s the emotion? And eventually, it clicked.
It was about creativity, which I take very personally and emotionally. So that’s why. I was crying because it was about creativity. And that the computer made a creative choice that man wouldn’t have made. And the reason the computer made the creative choice was not because the computer was smarter. It was actually because the computer knew less. The men playing knew — not only did they know the rules of the game, but they also knew the traditions of the game. And they knew the whole history of the game, of what every great player had done before. And they knew what they learned in the school of playing. The computer was only playing by the rules of the game because it doesn’t know the cultural norms of the game. So the fact that man’s own baggage of beliefs of thinking we know best is what was holding man back.
Tippet:Yeah.
Rubin: And the computer was what showed us that. And I thought it was so beautiful because that gave me hope for everything. That means there’s so much that we think we know that we don’t know. And maybe the computers can help us remove the distracting information that we hold true that’s stopping us.
The ability of AI even in its current state is not going to be the best AI we see in our lives. While this version of OpenAI’s Deep Research isn’t going to beat a top ranked analyst today, it’s possible it can in the future. The AlphaGo moment for the average sell-side analyst may have already happened.
It’s important that everyone who is a knowledge worker begins to learn how to use AI collaboratively today. By far, that’s the most important thing to take away from this experiment. Can we shed the basic time-consuming nature of knowledge worker roles by collaborating with AI and reach new levels of creativity and insights? Or if we choose to ignore its potential, it will displace the knowledge workers like sell-side analysts who do not choose to embrace it as a thought partner.
How I am going to assess the AI-generated research report:
I am going to consider 3 key qualitative questions in my assessment:
Is it accurately sourcing information?
Would I have published something like this?
Have I seen research reports published at this quality level, indicative of an average sell-side report?
Is it accurately sourcing information?
As I read through each data point in the AI-generated report and saw the references embedded in the content, I began thinking, for this article, do I need to sanity check every single one of these data point references as supporting proof for the claims made by OpenAI’s Deep Research output? If it were my own research, I absolutely would double-check every single figure. The goal of this report is to show it as is so everyone reading it can weigh in. I’m not editing the output from OpenAI.
The AI relied on a wide range of sources to compile its report based on what it had free access to. A sell-side analyst would have access to various services that require logins and subscriptions to access, which OpenAI should not have access to. So it had to be creative in it’s sources used. In the appendix of the report, you can read the Deep Research running commentary, which was generated in real time during 7 minutes of processing before the report was delivered. OpenAI Deep Reesearch relied on a mix of reputable and unusual sources. It cited industry leaders like IWSR and NielsenIQ—but also an unexpected local news station, “WTVB | 1590 AM · 95.5 FM | The Voice of Branch County.” Clicking through, I found it was simply aggregating Thomson Reuters news, restoring some confidence. Still, this highlights AI’s occasional struggle to distinguish authoritative sources from secondary aggregators.
A Flaw: The AI Used Outdated Data; the AI relied on outdated data points to justify its conclusions. I’ve noticed it is heavily relying on older data points to justify its claims. I’m seeing 2023 fiscal year references for data points, which for Diageo and Pernod is a June fiscal year end (not December). I’m not sure if the machine knows these are 18-month-old data points. In the real world, the financial markets will surely have digested this old info and would care more about recent data points. While the numbers sound right to me about geographic exposures and growth rates, if I were going to publish a report, I would have actually spent the vast majority of the time going over and over the numbers, making sure they were 100% right. There isn’t room for small errors when convincing institutional investors how they should change their portfolios. This is a major shortcoming—potential reliance on outdated data undermines its investment thesis.
I need to re-prompt it to put the most weight on the data points of the prior 6 to 12 months to better reflect the way the market digests information. This is an important learning: in the absence of a clear prompt about the relevance of historical data points, it will fill in its own logic.
A major missing topic in the research: the risk of tariffs. The AI-generated report seems to have missed the risk of tariffs on the Tequila business in the US for both companies. I need to prompt it to include some thoughts on this in the risk section in a second prompt while I’m clarifying the relevance of historical data points.
The valuation and consensus comparison appear realistic in both style and argumentation. But is the valuation accurate, and does it correctly interpret consensus estimates? Is its target price and relevant multiples to get to the target correctly done? The AI seems to have written up a valuation methodology that makes sense in the words it chose. It’s actually quite impressive that it captured the typical valuation write-up. If anything, it’s more detailed than some of the valuation sections in sell-side research. I’ve seen examples where analysts just say what multiple they apply to their earnings and have no written justification for the multiple selection. Based on the sources it found online, it seems like it’s using reasonable numbers for the P/E multiples and the earnings. This is better than I would have expected it to do.
It’s important to note that there’s not an actual financial model behind these figures. Rather, it’s just reasoning to the conclusion. While some analysts are known for building models and following the data to tell them the recommendation, there are plenty of analysts who start with their outlook view and then work backwards to the model and valuation inputs that generate a target price that works for their rating. I definitely do not recommend that approach, but if we are comparing with the average sell-side analyst, this isn’t too far from what happens.
Conclusion: With a second prompt, it is possible this can meet an average institutional investment grade quality research, but on a single-shot prompt it falls short (feels like user error, not limitations of Deep Research).
I will re-run the report with clearer instructions prioritizing recent data over outdated figures. That prompt should improve the value of the data points referenced in its investment arguments supporting the conclusions it generated.
Even if the data were perfect, would I publish this as my own research? No.
It lacks the depth needed for top-tier sell-side rankings. There’s nothing proprietary about the insights. There’s no analytical reasoning that looks for underlying clues that trends are turning for better or worse by digging deeper into data or applying analogous scenarios.
Is this something I could see meeting the standard of average sell-side research? Yes.
The vast majority of the AI write-up is backward looking for facts and then creating subjective opinions about how things will turn around for the two companies. The AI’s opinions about future industry and company fundamentals trends are explained logically. The valuation and comparison to consensus are logical in nature.
This reflects the work of average sell-side analysts, who often summarize past data and align with consensus ratings rather than adding fresh insights. In any coverage sector, there is a lot of consensus-hugging, where sell-side analysts avoid controversial opinions and keep their stock ratings and forecasts close to consensus estimates, often to maintain relationships with corporate management or avoid reputational risk.
This could pass for one of the 20 analysts that cover these companies currently. Most sell-side analysts operate within firms lacking a platform advantage, and by definition, the majority do not rank at the top. This AI generated report could meet that “average” threshold.
Here’s the unedited version of first take report by OpenAI’s Deep Research below. This is text-based. So, you’ll have to image various line charts, bar charts and other graphics that typically are included in sell-side research. It includes the links to the OpenAI Deep Research references. It would be great to hear your take on the AI’s work if you follow the links. Feel free to comment on the article or email me directly.
***Disclaimer: Seriously! It might look like investment research, but this is definitely NOT investment Research and should NOT be relied on for any investment decisions. This is a thought experiment to see how OpenAI’s Deep Research would stack up compared to real investment research. I did not edit anything in the report generated by the AI. The numbers could be wrong, and the facts could be wrong.***
🤖ChatGPT o3-Mini Deep Research:
Take 1: Equity Research Report: Diageo & Pernod Ricard
Executive Summary:
Diageo plc (DGE LN) and Pernod Ricard SA (RI FP) are the world’s leading spirits companies, commanding global portfolios of premium alcohol brands. Both face near-term headwinds from a challenging macroeconomic backdrop – including high inflation, forex volatility, and softer consumer spending – which have recently led to flat-to-declining sales growth and reduced guidance. Nonetheless, long-term industry tailwinds such as premiumization and emerging-market demand remain intact, supporting a gradual recovery. Valuations for Diageo and Pernod have de-rated to multi-year lows (mid-teens P/E multiples) relative to their history, suggesting that much of the bad news is priced in. We recommend a Buy on Diageo and Pernod Ricard, expecting a mid-to-high teens total return over 12 months as earnings stabilize and investor sentiment improves. Our bullish view is predicated on each company’s strong brand franchises, geographical diversification, and potential for margin recovery, balanced against ongoing risks in key markets.
1. Industry Dynamics
Spirits Sector at an Inflection Point: The global beverage alcohol industry is navigating a post-pandemic “reset year,” marked by slowing volumes and shifting consumer behaviors (US spirits face 'challenging' 2025 - The Spirits Business) (US spirits face 'challenging' 2025 - The Spirits Business). In 2024, total alcohol sales growth stalled, with spirits seeing a modest -1% value decline (off-premise) in the U.S. and volume down ~2% (2024 Beverage Alcohol Year in Review - NIQ). This softness followed an exceptional pandemic period where spirits demand surged, leading to excess inventory in the channel. The current environment is characterized by economic headwinds that are tempering demand for high-end liquor, even as longer-term tailwinds like premiumization and innovation persist. Below, we outline key headwinds and tailwinds affecting the industry, followed by a regional breakdown (North America, Europe, China, Rest of World) of consumption trends and outlook.
Forex Volatility: Sharp currency fluctuations are a headwind to reported results. A strong USD in 2022/23 boosted costs for non-U.S. markets and translated into adverse FX for companies reporting in GBP/EUR. Pernod Ricard’s H1 FY25 sales were 6% reported vs. -4% organic, reflecting a €177m FX hit from emerging-market currency devaluations (notably the Argentine peso, Turkish lira, and Nigerian naira) (H1 FY25 Sales and Results | Pernod Ricard) (H1 FY25 Sales and Results | Pernod Ricard). Diageo likewise saw a >£150m unfavorable FX impact in H1 FY24 (2024 Interim results, half year ended 31 December 2023 | Diageo). While some currencies have stabilized, FX remains a swing factor given wide geographic exposure (e.g. any USD weakness would drag on Diageo’s reported growth, whereas EM currency recoveries would help Pernod).
Supply Chain & Input Costs: Although global supply chain pressures have eased from their 2021 peaks, spirits makers still contend with elevated input costs and periodic shortages. Key commodities (grain neutral spirits, agave for tequila, glass bottles) saw price spikes in recent years. Glass bottle shortages, for instance, forced producers to secure supplies well in advance and at higher cost throughout 2022–24. Elevated logistics and packaging costs have put pressure on gross margins, necessitating price increases which can dampen volume. The industry is managing through, and indeed Diageo noted that its price hikes have offset inflation in absolute terms, but gross margin has still slipped (~-100 bps in FY23) (Diageo : 2023 Preliminary Results, year ended 30 June 2023 -August 01, 2023 at 04:10 am EDT | MarketScreener). Supply chain resilience investments (e.g. Diageo’s capex in production & sustainability) should gradually improve cost efficiency, but in the near term margins remain sensitive to input inflation.
Resilience of Spirits vs. Beer/Wine: Spirits have been gaining share of total alcohol consumption, a positive mix shift for Diageo and Pernod. In the U.S., spirits revenue overtook beer in market share for the first time in 2023 (Spirits sales top beer and wine in 2023 - CNBC), reflecting decades of steady growth. Spirits volumes held up far better than beer or wine during recent downturns – for example, U.S. spirits revenue dipped only ~1% in 2024, while wine fell ~3.5% and beer ~0.7% (2024 Beverage Alcohol Year in Review - NIQ). Spirits’ advantage comes from their broad usage occasions (cocktails, nightlife, at-home), higher aspirational branding, and the ability to command price increases without losing as much volume. Moreover, within spirits, the category mix is favorable: fast-growing segments like Tequila, American whiskey, and Irish whiskey have offset weakness in more traditional categories. (Indeed, Tequila and Canadian whisky were standouts in 2024, still posting growth in an otherwise soft U.S. spirits market (2024 Beverage Alcohol Year in Review - NIQ).) As on-trade venues normalize post-Covid, spirits (especially premium liquors for cocktails) should outpace beer/wine in volume recovery. Overall, spirits’ inherent profitability and premium image provide a cushion in tough times and a tailwind in recovery phases.
Emerging Markets Growth: Developing markets continue to offer a long runway of volume and value expansion. China and India are prime examples: China is already ~10% of global spirits value and, despite current headwinds, is expected to add $42 billion in market value 2022–2027 through premiumization (2024 and Beyond: Decoding Global Beverage Trends through Data with IWSR’s Emily Neill) (2024 and Beyond: Decoding Global Beverage Trends through Data with IWSR’s Emily Neill). India – the world’s largest whiskey market by volume – is seeing rising demand for international brands and higher-end local spirits as incomes rise. Pernod Ricard’s India business grew +6% organically in H1 FY25 even amid global softness (H1 FY25 Sales and Results | Pernod Ricard), with “strong, broad-based growth” across its whiskies (H1 FY25 Sales and Results | Pernod Ricard). Other high-potential markets include Sub-Saharan Africa (young demographics and a shift from illicit alcohol to branded spirits), Latin America (a burgeoning middle class in markets like Mexico, Colombia, Brazil), and Southeast Asia. These regions also benefit the spirits mix: consumers often enter the category via affordable local spirits and then aspire to Western premium brands (e.g., a trend Pernod calls “trading up from local whisky to Johnnie Walker or Chivas Regal”). While emerging markets can be volatile and subject to FX swings, their long-term volume growth (and increasing value via premiumization) is a cornerstone tailwind for the industry. Both Diageo and Pernod have invested heavily to build distribution and local partnerships in these markets, positioning them to reap outsized gains as conditions improve.
Low/No-Alcohol & Innovation: Health and wellness trends are spurring innovation in low- and no-alcohol beverages, turning a potential threat into an opportunity. In 2024, non-alcoholic “spirits” and mocktails gained significant traction – U.S. sales of non-alcohol beers, wines, and spirits neared $1 billion, up double-digits as consumers embrace moderation (2024 Beverage Alcohol Year in Review - NIQ) (2024 Beverage Alcohol Year in Review - NIQ). Rather than cede this space, major players are innovating within it: Diageo was an early mover with its Seedlip non-alcoholic spirit brand, and both companies have launched alcohol-free versions of flagship products (e.g. Gordon’s 0.0% gin, Café Zero by Kahlúa). While still a small fraction of revenue, this segment’s rapid growth broadens the consumer base (appealing to the health-conscious and Gen Z) and provides a hedge against tighter alcohol regulations. Additionally, the rise of ready-to-drink (RTD) cocktails is a related tailwind. RTDs were a notable exception to alcohol’s decline in 2024, continuing to grow and take share (2024 Beverage Alcohol Year in Review - NIQ). Spirits-branded RTDs (canned cocktails, etc.) are booming, leveraging brand equity in convenient formats. Both Diageo and Pernod have invested in RTD capacity and product launches (e.g. Crown Royal and Cîroc canned cocktails by Diageo; Malibu RTDs by Pernod). This innovation pipeline in RTDs and no/low-alc is adding incremental growth on top of the core spirits portfolio.
1.3 Regional Outlook
North America (≈35–40% of sales for Diageo; ~30% for Pernod): The U.S. market is in a hangover phase after an exuberant run in 2020–2022. Retail (off-premise) spirits sales experienced a rare decline in 2024 as inflation-pinched consumers cut back on high-ticket purchases (Liquor Sales Notch Rare Decline In 2024 As Top Shelf Demand Slows). Premiumization trends “stalled” in the U.S. – notably in tequila, which though still growing, decelerated from the explosive ~30%+ gains of prior years (2024 and Beyond: Decoding Global Beverage Trends through Data with IWSR’s Emily Neill) (2024 and Beyond: Decoding Global Beverage Trends through Data with IWSR’s Emily Neill). Instead, U.S. consumers gravitated to cheaper “premium but not super-premium” options (US spirits face 'challenging' 2025 - The Spirits Business). Consequently, industry volumes have dipped: total U.S. spirits volume was down ~3% in 2023 (US beverage alcohol market set for slow recovery after 'reset year') and is forecast to fall another ~5–6% in 2024 (US spirits face 'challenging' 2025 - The Spirits Business) (US spirits face 'challenging' 2025 - The Spirits Business), before stabilizing later in 2025. Within categories, brown spirits (American whiskey, Canadian whisky) and tequila remain relatively resilient (tequila still grew high-single digits in 2024 (2024 Beverage Alcohol Year in Review - NIQ)), while vodka and rum are softer. The on-premise channel recovery (bars/restaurants reopening fully) has helped support tequila and whiskey sales, but a slowdown in home consumption and retailer destocking has overshadowed those gains. For Diageo and Pernod, North America has been a weak spot recently: Diageo’s U.S. organic net sales were roughly flat in FY2023 and turned negative in H1 FY2024, and Pernod’s U.S. sales fell -7% in H1 FY25 (H1 FY25 Sales and Results | Pernod Ricard). Importantly, the sell-out (consumer offtake) trends are better than the sell-in – Pernod noted U.S. consumer demand was around +1% (incl. RTDs) even though its shipments were -7%, implying destocking is a big factor (H1 FY25 Sales and Results | Pernod Ricard). We expect U.S. trends to gradually improve through 2025 as inventories rebalance. Consumer demand in North America should get a mild boost from moderating inflation and low unemployment, though any recession in 2025 is a downside risk. Canada remains a bright spot (healthy growth and share gains, especially in RTDs (H1 FY25 Sales and Results | Pernod Ricard)), and Mexico – a top tequila market – is steady (flat consumer sell-out, even though reported sales dipped) (H1 FY25 Sales and Results | Pernod Ricard). Overall, North America’s short-term outlook is challenging but bottoming: industry leaders foresee the second half of 2025 being better than the first (H1 FY25 Sales and Results | Pernod Ricard), with a return to low-single-digit growth in 2026 under a base-case macro scenario.
Europe (≈20–25% of sales): Europe’s spirits market is mature and showed resilience through the recent downturn, albeit with significant intra-regional variation. In fiscal 2023, both companies posted solid growth in Europe (Diageo Europe +10% org.; Pernod Europe +8% org.) as reopening and pricing offset volume softness. Consumers largely accepted price increases in Western Europe, helping both revenue and margin. However, by late 2023 and into 2024, signs of softness emerged: persistent inflation (especially energy costs) in markets like the UK, Germany, and Spain began to weigh on volume. We are seeing a slight slowdown in Europe’s momentum – Pernod’s Europe sales were -2% organically in H1 FY25 (flat excluding Russia) (Deutsche Bank cuts Pernod Ricard shares target, warns of sales ...), indicating essentially stagnant volume. Southern Europe (Spain, Italy) benefitted from a tourism rebound and resilient on-trade in summer 2023, whereas Northern Europe saw more cautious consumption. Travel Retail in Europe (airports, etc.) had rebounded strongly in 2023, but is now normalizing and faces the comparison hurdle of last year’s surge. A unique European headwind is regulatory action: for instance, Ireland’s new labeling law (first of its kind globally) and Scotland’s debated alcohol ad ban reflect a tougher stance that could gradually dampen marketing effectiveness. On the other hand, premiumization is still evident in pockets of Europe – e.g. demand for single malt Scotch and prestige Cognac remains solid among affluent consumers, and categories like Irish whiskey and gin are growing in popularity. In aggregate, we expect Europe’s spirits consumption to be flat to +1% in the near term (volume declines offset by price/mix). Economic conditions are mixed – while the eurozone flirts with recession, unemployment remains low and wages are rising, supporting some discretionary spend. Diageo and Pernod’s broad brand portfolios position them to weather Europe’s ups and downs: weakness in mainstream brands (say, standard vodka) can be offset by strength in super-premium (craft gin, single malts) sold to higher-income consumer segments. We view Europe as a stable, low-growth region with ongoing margin upside from pricing and cost discipline.
China (High-Single-Digit % of sales for Diageo; ~10–15% for Pernod): China has been a boom-bust story for global spirits. After a sharp rebound in early 2023 post-zero-Covid, the Chinese economy lost steam, and consumer confidence waned. This hit discretionary categories: Pernod Ricard’s sales in China plunged -25% in the July–Dec 2024 period (H1 FY25 Sales and Results | Pernod Ricard), and Remy Cointreau (whose business is ~40% China-driven) saw a similar -30% drop as the mid-autumn festival season disappointed. Two factors are at play: a weak macroeconomic backdrop (youth unemployment, property market stress) and a renewed anti-extravagance sentiment discouraging conspicuous consumption of expensive liquor. High-end Cognac – Pernod’s Martell and Remy’s Louis XIII – has been particularly impacted by reduced gifting and banqueting demand (Pernod reports sharp -26% sales drop in China - Drinks International) (Pernod revises FY outlook after sharp sales drop in China). In contrast, more affordable premium brands (e.g. Pernod’s Chivas Regal Scotch or Ballantine’s, or Diageo’s Johnnie Walker Black Label) are seeing some continued uptake by the growing middle class, though not enough to offset the top-tier decline. It’s important to note that underlying consumer consumption in China likely fell less than shipments, as destocking by wholesalers contributed to the steep sales declines (similar to the U.S. pattern). Looking ahead, we expect China to stabilize over the next 12 months at a lower base. Companies have become more cautious, now forecasting China sales to remain weak for at least a couple more quarters (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer) (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer). However, the medium-term outlook is still for growth: China’s younger consumers are developing a taste for Western spirits (especially whisky and rum cocktails), and premiumization in China remains robust – IWSR predicts China’s total alcohol value will grow (+$40bn by 2027) even as volume inches down (2024 and Beyond: Decoding Global Beverage Trends through Data with IWSR’s Emily Neill) (2024 and Beyond: Decoding Global Beverage Trends through Data with IWSR’s Emily Neill). A recovery in consumer sentiment, perhaps via government stimulus or simply cyclical upturn, would unleash pent-up demand in China’s nightlife and upscale dining scenes. One wild card is competition from baijiu (China’s national spirit): it dominates local drinking and is expanding into lower price tiers, which could squeeze foreign spirits at the entry level. Both Diageo and Pernod are responding by localizing – Pernod has introduced a China-specific whisky (“Chuan” malt) and Diageo is building a malt distillery in Yunnan (Challenging China's national drink is tall order for Western liquor ...) – aiming to cater to Chinese tastes. In sum, China is currently a significant drag on industry growth, but we view it as a temporary trough; the market’s size and appetite for premium products make it too important to ignore, and we expect a modest rebound (mid-single-digit growth) in FY2026 as macro conditions improve.
Rest of World (including Emerging Asia ex-China, Africa, Latin America): This diverse segment is the growth engine for both companies, fueled by favorable demographics and rising incomes. India stands out: it is Pernod Ricard’s second-largest market by volume and delivered +6% growth in H1 FY25 despite global headwinds (H1 FY25 Sales and Results | Pernod Ricard). Both Pernod and Diageo (via United Spirits) enjoy leadership in India’s whisky segment and are moving consumers up the value chain (e.g. from local whiskies to imported Scotch). Regulatory quirks (high taxes, advertising bans) make India challenging, but the sheer volume growth (legal spirits volume +5% CAGR expected) and premiumization (a new middle class of ~30 million consumers) underpin a strong outlook. Africa (nearly ~10% of Diageo sales) offers high growth albeit from a low base: Diageo has a deep footprint with local beers (Guinness, Tusker) and mainstream spirits, which saw double-digit organic growth in FY2023 (Pernod returns to growth as China woes ease - The Spirits Business) (Pernod returns to growth as China woes ease - The Spirits Business). Economic volatility (e.g. currency devaluations in Nigeria, South Africa’s slow growth) can cause gyrations year to year, but the long-term trend is one of gradually expanding spirits penetration in Africa. Latin America had a roller coaster: strong post-Covid demand in 2022 gave way to steep destocking in 2023. Diageo’s LATAM sales dropped ~20% in late 2023 (How long will destocking headaches last for fmcg players? | Comment & Opinion | The Grocer), but this is expected to normalize – indeed Pernod noted Brazil returned to growth in late 2024 as consumer demand picked up (H1 FY25 Sales and Results | Pernod Ricard). Key LatAm markets like Brazil and Colombia are recovering from inflation spikes, and young populations there are drawn to international brands (e.g. Buchanan’s Scotch is hugely popular in Latin America). Travel Retail (Global Duty-Free) is another component, comprising high-single-digit percent of sales for Pernod. It had a robust comeback in 2022/23 as international travel resumed, though growth cooled in late 2024 (Pernod’s Global Travel Retail was -9% in H1 FY25) (H1 FY25 Sales and Results | Pernod Ricard), partly due to fewer Chinese travelers. We expect travel retail to remain a valuable channel for premium spirits (lots of impulse luxury purchases in duty-free) and to resume growth as Asia outbound travel recovers. On balance, “Rest of World” markets should deliver the highest growth for the companies over the next 5 years – we model a +6-8% organic sales CAGR in emerging Asia and Africa, versus low single digits in developed markets. Managing volatility and currency risk will be crucial, but both Diageo and Pernod have proven adept at navigating these markets through local talent and agile pricing (e.g. Pernod’s swift price increases in Turkey and Argentina to offset inflation).
Bottom Line: The industry faces a tough near-term road with macro headwinds in North America, Europe, and especially China causing a “new normal” of slower growth (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer) (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer). However, underlying drivers like premiumization and emerging market demand provide a safety net and medium-term upside. We anticipate that 2025 will be a year of stabilization – likely a low point for organic growth – followed by re-acceleration in 2026–2027 as comparables ease and consumer conditions improve. The spirits sector historically proves resilient (even in past recessions, volume declines were mild), and current trends such as moderation or trading-down appear cyclical rather than structural. Investors should monitor U.S. consumer health, China’s policy signals, and any destocking progress for cues on timing of the inflection.
Recent Headwinds & Execution Challenges: Diageo’s FY2024 (year ended June 2024) was weaker than expected, marking the end of a long streak of robust growth. Organic net sales declined ~0.6% (the first drop in years) (Diageo's “challenging” FY24 - key takeaways - Just Drinks). The primary issues were: (a) a sharp slowdown in North America, where shipments were curtailed by destocking and high comparables, and (b) underperformance in Asia (notably China). The company also faced margin pressure from cost inflation and adverse mix. Going into FY2025, new CEO Debra Crew (who took the helm in mid-2023) issued a profit warning and withdrew Diageo’s mid-term guidance of 5–7% organic sales growth (Diageo withdraws medium-term sales forecast | WTVB | 1590 AM · 95.5 FM | The Voice of Branch County) (Diageo withdraws medium-term sales forecast | WTVB | 1590 AM · 95.5 FM | The Voice of Branch County), citing the uncertain environment. This was a significant development – Diageo had long been seen as a steady compounder, so pausing guidance signals that the near-term visibility is limited. Specifically, management is grappling with:
U.S. Destocking “Hangover”: As noted, U.S. wholesalers built up excess inventory in late 2021/2022 (fueled by stimulus-driven demand), which they have been unwinding. Diageo’s high exposure to U.S. spirits made it vulnerable – the company estimates industry depletions (consumer sales) outpaced its shipments by several percentage points in 2023, implying channel inventory reduction. This is a transitory issue, but it raises execution questions: did Diageo overestimate sustainable demand and over-ship? It is now having to recalibrate and work closely with distributors to right-size stock levels. Encouragingly, Diageo signaled that by early 2025, sell-out trends in the U.S. were improving (flat to slight growth) even as sell-in was down, which should eventually translate to normalized ordering (H1 FY25 Sales and Results | Pernod Ricard).
China and Asia Weakness: Diageo’s business in China is smaller than Pernod’s but still important for Scotch and baijiu. The abrupt downturn in Chinese demand (due to macro and anti-graft measures) hurt Johnnie Walker and Shui Jing Fang (its baijiu brand). Additionally, some other Asian markets like South East Asia and Travel Retail slowed in late 2023. Diageo will need to navigate China’s new normal carefully – ensuring brand equity of its premium Scotches isn’t eroded and avoiding overstocking in channels like travel retail. One risk is that if China’s recovery is protracted, Diageo’s prestige segment (e.g. high-end Johnnie Walker Blue Label) could see persistent weakness. The company has responded by increasing marketing support in China and launching white spirits (the planned China whisky distillery is a long-term play to cater to local preferences (Challenging China's national drink is tall order for Western liquor ...)). Execution in China will be key, as it’s a market where Diageo historically lagged Pernod and is trying to catch up.
Innovation Pipeline & RTDs: Diageo’s growth has been aided by a strong innovation track record (flavor extensions, new formats). Recently, however, competition in RTDs and new products has intensified. There is some concern that Diageo needs another hit product akin to Crown Royal Peach or Casamigos RTDs to jumpstart growth in the U.S. market. The company is rolling out offerings (e.g. Cîroc vodka spritz, Captain Morgan cola in a can) and experimenting with lower-alc versions of core brands. While these are promising, innovation comes with execution risk – not every new product will succeed, and consumer tastes are fickle, especially among younger LDA (legal drinking age) cohorts. Diageo must also execute on trends like low-carb or wellness-focused spirits (areas where smaller craft brands have popped up) to ensure it stays relevant.
FX and Cost Management: With the U.S. dollar’s rise in 2022, Diageo enjoyed a translation benefit (since it reports in sterling). That has reversed more recently, with FX swinging to a headwind. Additionally, as mentioned, costs (ingredients, packaging, logistics) remain higher than pre-pandemic. Diageo is working on productivity (it delivered ~£900m in efficiency savings since FY21 through its “fuel for growth” cost programs) and has moderated A&P (advertising & promotion) spend in the short term to protect margins. Nonetheless, execution risk exists if Diageo cuts too deeply on brand investment during a slump – it could harm long-term brand health. Balancing cost discipline with continued brand building is a challenge management is navigating. So far, Diageo has stated it’s maintaining marketing investment, even as it finds other cost levers to pull (Diageo : 2023 Preliminary Results, year ended 30 June 2023 -August 01, 2023 at 04:10 am EDT | MarketScreener) (Diageo : 2023 Preliminary Results, year ended 30 June 2023 -August 01, 2023 at 04:10 am EDT | MarketScreener).
Outlook and Opportunities: Despite short-term headwinds, Diageo has multiple avenues for growth. In North America, aside from a normalization of inventory, Diageo can capitalize on growth categories like tequila (Don Julio and Casamigos remain top equity brands riding the agave boom) and Canadian whisky (Crown Royal). The company also sees an opportunity in the U.S. to premiumize further – e.g. pushing more of its “Reserve” portfolio (Ketel One Botanical, Bulleit Bourbon, malts like Lagavulin) as consumers seek craft-like quality from big brands. Internationally, India is a huge opportunity: Diageo’s majority stake in United Spirits gives it access to India’s leading whisky portfolio, and as that market premiumizes, Diageo’s revenue mix in India can shift from value brands to mid-tier and international brands, boosting margins. Africa is another region Diageo is investing in, both in mainstream spirits and local production (for affordability). Moreover, as a leader in digital marketing and distribution, Diageo has been leveraging data and e-commerce (it significantly grew e-commerce sales during the pandemic) – these digital efforts can drive market share gains particularly among younger consumers who purchase online. In short, Diageo’s wide footprint means it can capture upsides wherever they occur. Execution risks persist, but the company’s track record prior to this recent stumble gives some confidence that it can right the ship.
2.2 Pernod Ricard SA (RI FP)
Portfolio & Market Position: Pernod Ricard is the world’s #2 spirits company, boasting a highly complementary portfolio to Diageo’s. Its flagship brands include international best-sellers like Absolut vodka, Jameson Irish whiskey, Martell cognac, Ballantine’s and Chivas Regal Scotch whiskies, Beefeater gin, Malibu rum liqueur, and Champagne marques (Mumm, Perrier-Jouët). Pernod’s portfolio skews a bit more toward whiskies and cognac and slightly less to liqueurs/beer compared to Diageo. Key revenue drivers are Strategic International Brands – the top 12 global brands (Absolut, Jameson, Martell, Ballantine’s, Chivas, etc.) – which make up ~62% of sales (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener). The company also has Strategic Local Brands (~18% of sales) like Seagram’s whiskies in India, Seagram’s Gin in Spain, and other local champions (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener), plus a portfolio of specialty/craft brands (~7%) such as Monkey 47 gin, Aberlour single malt, and other niche labels acquired in recent years (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener). Wines (Jacob’s Creek, Campo Viejo, etc.) are a smaller part (~4%). This mix highlights Pernod’s focus on spirits (over 90% of sales) and its strength in both the premium international segment and important local categories (e.g. Indian whiskies, which Pernod leads). Pernod’s house of brands is well-balanced: it has leadership in whiskey (the Jameson franchise is booming worldwide, and it has a stable of Scotch brands), a solid position in vodka (Absolut remains #2 globally in premium vodka), and a coveted spot in cognac (Martell is one of the “big three” cognacs in China, competing with Hennessy and Remy Martin). Absent from Pernod’s lineup until recently was tequila, but they have invested in that too – Pernod owns Avión and Del Maguey mezcal, and in 2023 took a stake in Código 1530 tequila, recognizing agave’s growth. Overall, Pernod’s portfolio is viewed as slightly less broad than Diageo’s but very strong in its core areas, with a tilt toward ultra-premium brands (its prestige portfolio in cognac and whisky is a high-margin niche).
Geographic Exposure: Pernod Ricard generates sales across 160+ countries, with a management structure split into three broad regions: Americas (~29% of sales), Europe (~28%), and Asia/Rest of World (~43%) (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener) (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener). This indicates Pernod has heavier exposure to emerging markets/Asia than Diageo. Indeed, Pernod historically derived outsized growth from China (thanks to Martell cognac popularity) and India (where it has ~50% share of the whiskey market via brands like Royal Stag, Blender’s Pride). For perspective, in the last pre-Covid year of 2019, China was ~10% of Pernod’s global sales and India ~7–8% – those shares have likely risen. Pernod’s Americas business is sizable but smaller than Diageo’s: the U.S. is about 15% of sales (Pernod’s top brands there are Jameson, Absolut, Martell, and tequila/mezcal), and the company also has significant presence in Canada, Brazil, and Mexico. Europe for Pernod includes its home market France (big for Ricard pastis and champagnes), Spain, UK, Germany, and Eastern Europe. One notable drag has been Russia – Pernod ceased exports to Russia in 2023 (and is dismantling distribution there) due to the Ukraine war; Russia had been a mid-sized market (~3% of sales). Excluding that, Europe was flattish recently. Asia/ROW is Pernod’s main growth engine, but also its Achilles heel in FY24 due to China’s slump. Pernod’s earnings sensitivity to China is high: a rough estimate is that China (Greater China incl. HK) could be 15–20% of EBIT historically, given the high profitability of cognac. Thus the Chinese anti-graft headwind has disproportionately hurt Pernod’s overall performance (indeed FY2024 sales were -1% organic, dragged down by Cognac in China (Pernod reports sharp -26% sales drop in China - Drinks International)). Conversely, Pernod is seeing stellar performance in India (often double-digit growth) and good momentum in many ASEAN markets. Latin America and Africa are relatively smaller in Pernod’s mix vs Diageo, but not insignificant – the company has been expanding in Africa (investing in local manufacturing in Kenya, Nigeria) and Latin America (portfolio is heavy on Scotch there). Pernod’s global footprint gives it a nice balance between mature markets (which provide cash flow) and emerging markets (which provide growth). However, at the moment that balance is skewed negative because its two biggest EM bets – China and India – are on opposite trajectories (China down, India up). Managing through that divergence is a key focus for management.
China’s Anti-Corruption Crackdown: Pernod has been hit hard by the Chinese government’s campaign against extravagance. Historically, a significant portion of Martell Cognac in China was consumed in banquets, business gifting, and nightlife by affluent consumers and officials. With stricter enforcement of anti-graft rules and a cultural shift against ostentatious display, demand for ultra-premium Cognac (Martell Cordon Bleu, XO) and high-end Scotch in China dropped sharply (Pernod revises FY outlook after sharp sales drop in China) (Pernod reports sharp -26% sales drop in China - Drinks International). Pernod’s leadership has called out a “challenging macro and social environment” in China. The risk is that this isn’t just cyclical – it could represent a structural reset to a lower level of luxury spirits consumption by China’s elite. Pernod is mitigating by pivoting to the broader base of middle-class consumers (positioning Martell’s cheaper VSOP expressions and pushing whisky and gin which fit casual occasions). Nonetheless, the China situation remains the biggest swing factor for Pernod’s growth, and it carries execution risk: if they fail to reignite growth in China (or if Beijing imposes new restrictions on alcohol at official functions, etc.), Pernod’s aspirational mid-term targets would be in jeopardy.
Competition in Premium Spirits: As the industry’s #2, Pernod often competes head-to-head with Diageo and other global rivals in key categories. In the U.S., for example, Pernod’s Absolut has lost market share to Diageo’s Smirnoff and to upstart Tito’s; similarly, in Scotch, Pernod’s Chivas Regal has faced pressure from Diageo’s Johnnie Walker. At the high end, competition from LVMH (which owns Hennessy cognac and Ardbeg/Glenmorangie malts) and family-owned Bacardi (Patrón tequila, Grey Goose vodka) is intense. Pernod’s challenge is to maintain its brand equity and share in an increasingly crowded premium market. One area to watch is American whiskey – Pernod’s portfolio lacked a U.S. bourbon until it acquired Rabbit Hole in 2019 and a minority of Jefferson’s. It’s still a small player in that booming segment, while rivals have stronger bourbon positions. Another area is tequila: Pernod was late to invest here and is now trying to catch up (tequila is under “Specialty Brands” for Pernod, i.e. not yet one of its core drivers). If tequila continues to surge, Pernod’s weaker position (relative to Diageo’s Don Julio/Casamigos or Becle’s Jose Cuervo) could be a growth opportunity they miss. On the positive side, Pernod has demonstrated strength in categories like Irish whiskey (Jameson’s meteoric rise – now 12M+ cases annually – is a big success) and gin (Beefeater and Malfy in premium gin). But as growth shifts, Pernod needs to ensure it has the right brands – which may entail more acquisitions or partnerships (with attendant execution risk integrating them).
Market Share & Pricing Power: In many markets, Pernod is #1 or #2, which usually confers pricing power. However, there are some markets where heavy competitive dynamics or regulation limit price increases. For instance, in India, a significant portion of Pernod’s volume is inexpensive whiskies where state-level price controls can cap increases; margins there are thinner compared to Pernod’s global average. In Europe, while Pernod managed to raise prices ~10% in FY23 (contributing to growth), further hikes might be tough if inflation-strapped consumers begin to push back or if discounting by competitors (or private label) picks up. Another example is duty-free: travelers are price-sensitive, and currency fluctuations can affect perceived pricing – Pernod might have less flexibility to raise prices in travel retail without losing volume. Overall, Pernod’s pricing power is solid for its top brands (which have loyal followings), but not uniform across its portfolio. If inflation in production costs remains high, Pernod could see margin squeeze in markets where it can’t fully pass through increases.
Execution in the U.S. (Turnaround needed): The U.S. is a key growth market where Pernod has under-indexed relative to peers. Absolut Vodka’s long decline in the U.S. (from its peak in mid-2000s) has been a sore point – Pernod is trying to rejuvenate it with new marketing and flavors, but it’s an uphill battle in a vodka category dominated by local brands and new entrants. Similarly, Martell has not achieved the same popularity in the U.S. as Hennessy (LVMH), which owns ~60% of the U.S. cognac market. So Pernod has room to grow if it can execute better in the U.S., especially as trends like craft cocktails (which favor its Jameson or Monkey 47 gin) and tequila (Mezcal Del Maguey is trendy) play out. Management has recently reorganized North America and increased focus (they appointed a dedicated CEO for North America, Ann Mukherjee, in 2019). Early signs show improvement – Jameson continues double-digit growth in the U.S., and smaller brands like Aberlour single malt are picking up. But the U.S. business still lags in profitability (the company has hinted at need to improve operational efficiency in the market). Successful execution in the U.S. – revitalizing Absolut, scaling up new categories – represents upside not currently fully factored into guidance.
Financials – Revenue/Profit by Region & Category: Pernod does not publicly break out profit by region, but qualitatively: Asia (especially China) has been its most profitable region historically (cognac margins are very high), whereas Americas and Europe have more middling margins. With China’s downturn, group operating margin came under a bit of pressure. By category, the highest margin segment for Pernod is Cognac (Martell) and Champagne, followed by premium whiskies. Volume-wise, Pernod’s top brand by far is Jameson (Irish whiskey) – over 10 million cases globally, with the U.S. a huge component. Absolut is also ~10M cases but has been flat/down. Martell and Ballantine’s are ~3M+ cases each. In India, local whiskies under the Seagram’s franchise exceed 30M cases (large volumes, lower unit price). So revenue contribution skews much more to the premium international brands despite local brands’ volume heft. Regionally (as per the breakdown cited): Europe ~28.3%, Americas 28.8%, Other (Asia/ROW) 42.9% (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener) (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener). Profit is likely even more weighted to Asia given China historically. The current dynamic likely has Europe and Americas carrying more weight in profit as China’s profit plummeted with volume de-leverage.
Strategic Outlook: Pernod’s management (led by CEO Alexandre Ricard) remains committed to its “Transform and Accelerate” strategic plan, which targets +4–7% organic sales growth and +50–60 bps margin expansion annually over a cycle (mid-term FY27–FY29 guide was recently toned down to +3–6% growth (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer)). To achieve this, Pernod is banking on a return to growth in China by FY2026, continued double-digit growth in India, and mid-single-digit growth in the U.S. and Europe. Key strategic initiatives include: premiumization of the portfolio (focus on prestige brands and innovation like limited editions), digital acceleration (they’ve developed a direct-to-consumer e-commerce in China and digital marketing globally), and sustainability & responsibility (which helps brand image and pre-empts regulatory issues). Pernod has also engaged in portfolio management: notably, it is reportedly exploring the sale of its wine and champagne assets (the Mumm and Perrier-Jouët champagne houses) (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener) (Pernod Ricard lowers annual sales guidance -February 06, 2025 at 01:07 pm IST | MarketScreener) to focus purely on spirits. Such a sale could unlock value and improve margins, as those categories have lower growth. Pernod’s solid balance sheet (Net Debt/EBITDA ~2.5x) and family shareholder support (the Ricard family ~15% stake) give it flexibility to invest for growth, even in lean times. In summary, Pernod’s challenges are real – especially China reliance – but the company has multiple growth levers and a demonstrated ability to adapt (it survived prior China crackdowns in 2012–15 and emerged stronger, for example, by diversifying its growth base (Pernod returns to growth as China woes ease - The Spirits Business) (Pernod returns to growth as China woes ease - The Spirits Business)). The next 1-2 years will test Pernod’s execution in mitigating the China impact and accelerating elsewhere.
3. Financial Forecasts (Next 5 Years)
We project a moderate recovery trajectory for both Diageo and Pernod Ricard over the next five years (FY2025–FY2029), with low growth in the near term giving way to improved trends in outer years. Our base case assumes global macro conditions neither deteriorate significantly into a deep recession (downside scenario) nor boom unexpectedly (upside scenario), but gradually improve from 2025 onward (inflation cools, consumer confidence rebuilds, China stabilizes). We model separate forecasts for each company’s revenue and operating profit, summarized as follows:
3.1 Base Case Forecast (FY2025–2029):
Diageo: We forecast a 5-year revenue CAGR of ~4% (in organic terms) for Diageo, and an operating profit CAGR of ~6%. In FY2025 (current year to June 2025), we expect organic net sales roughly flat (+0 to +1%) given H1 was +1% (Diageo withdraws medium-term sales forecast | WTVB | 1590 AM · 95.5 FM | The Voice of Branch County) and H2 should improve slightly. This is below the prior mid-term guidance (5–7%) which was withdrawn. Growth should then pick up to ~+3% in FY26, ~+5% in FY27, and stabilize around mid-single-digit by FY28–29 as emerging market momentum offsets plateaued developed market volumes. By region, we anticipate North America returns to low-single-digit growth from FY26 onward (after ~0% in FY25) as U.S. destocking ends and spirits demand modestly rebounds. Europe we see ~+2% steady growth (price-driven). Asia-Pacific (including China) is the swing factor: after a decline in FY24 and likely flat FY25, we model a rebound to +6% in FY26 and high-single-digit in FY27–28 as China normalizes and India continues double digits. Africa/LatAm should contribute mid-single-digit growth throughout (volatility notwithstanding). On operating profit, Diageo’s margins took a hit in FY24 (organic op margin down ~100 bps) but we expect gradual improvement. We forecast a +50 bps margin expansion per year on average from FY2026–29, driven by easing cost inflation, cost savings initiatives, and mix shift back to premium segments. That yields op profit growth roughly 1.5x the pace of sales growth in the outer years (i.e. high-single-digit EPS growth).
Pernod Ricard: We forecast a 5-year revenue CAGR of ~3.5% and operating profit CAGR of ~5% for Pernod (organically). We are slightly more conservative on Pernod due to its China exposure and current downturn. For FY2025 (year to June 2025), we incorporate management’s revised guidance of a low-single-digit organic sales decline (we model -1% sales, ~0% EBIT) (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer) (Diageo and Pernod Ricard show ‘challenging’ is the new normal | The Grocer). This assumes H2 FY25 is roughly flat y/y, an improvement from H1’s -4% (H1 FY25 Sales and Results | Pernod Ricard). In FY2026, our base case assumes China stabilizes (no further decline, perhaps slight growth if consumer stimulus occurs), and India plus other emerging markets continue strong – thus we project Pernod’s sales resume growth at ~+4% in FY26. For FY2027–29, we model ~+5% annual sales growth, towards the lower end of Pernod’s prior 4–7% mid-term ambition. Key contributors: sustained double-digit growth in India and Africa, recovery to mid-single-digit growth in China (assuming by FY27 the anti-graft impact has annualized and the market returns to expansion, albeit slower than pre-2020), and low-to-mid single-digit in U.S./Europe. On profitability, Pernod’s FY2024 margin was roughly flat, and FY2025 margin will likely be slightly down given fixed cost deleverage in H1. We then forecast margin expansion resuming in FY26 and beyond, averaging +40–50 bps a year – slightly slower pace than Diageo, reflecting Pernod’s heavier emerging-market mix (which might require continued A&P investment). By FY2029, our base case has Pernod back at healthy growth: mid-single-digit top line, high-single-digit EPS growth.
These base case projections assume no major acquisitions or divestitures (aside from the possible wine division sale for Pernod, which would actually slightly reduce revenue but improve margin – not yet factored in). They also assume FX stays around current levels (we do not try to predict currency, but note that could swing reported numbers). The base case essentially sees the companies returning to their long-term growth algorithms by FY2027, but off a lower FY2025 base due to the current dip. This yields cumulative growth over five years that is below what was envisaged pre-2023, reflecting the “lost year” of FY24–25 and lingering caution on China.
3.2 Downside Scenario:
In a downside macro scenario (e.g. a mild global recession in 2025, further weakness in China, and continued consumer frugality), both companies could experience sluggish growth and margin pressure. In this case, FY2025 would be clearly negative for Pernod (perhaps -3 to -5% sales) and around flat for Diageo, and FY2026 would see only a tepid recovery. We estimate a downside 5-year CAGR of only ~1–2% for sales. In this scenario, developed market volumes might continue to decline modestly (as consumers trade down or drink less), while emerging markets grow slower than expected (e.g. India growth cut in half). Companies might be forced to rein in pricing increases to sustain volume, compressing margins. For example, if U.S. spirits demand stayed flat or declines into 2025 (rather than recovering) and China saw another year of decline, Diageo and Pernod’s FY26 growth could remain near zero. They would then rely on cost cuts to support earnings. In our downside case, we’d see perhaps flat to +2% EPS growth on average – essentially stagnation. Notably, both companies proved in the past they can still eke out profit growth even in low sales periods (through cost control), so we don’t anticipate a collapse in earnings, but certainly a far cry from historical high-single-digit growth. Investors should watch indicators like U.S. unemployment (if it spikes, that’d hit bar/restaurant traffic) and China’s economic policy (if no stimulus comes, the spirits market could keep shrinking). Also, a downside case could involve persistent forex headwinds (e.g. further EM currency depreciation, or a strengthening GBP/EUR) which would lower reported results; Pernod, for instance, said FX could cut FY25 profit by a mid-single-digit percentage if current rates persist (H1 FY25 Sales and Results | Pernod Ricard). In summary, the downside scenario is one of a prolonged hangover: minimal growth and the need for aggressive belt-tightening.
3.3 Upside Scenario:
In an upside scenario (global growth surprises to the upside, consumer confidence returns quickly, and China rebounds strongly in late 2025), the spirits sector could regain a mid-to-high-single-digit growth footing sooner. In this case, Diageo and Pernod might exceed their pre-set targets. We envision an upside 5-year CAGR of ~6–7% for sales and ~8–10% for EPS. Catalysts in this scenario include: a faster-than-expected revival of high-end demand in China (perhaps the Chinese government stimulates consumption or the cultural mood shifts back, leading to +10% rebound year for spirits there), and robust demand in the U.S. (where premiumization re-accelerates as inflation abates and real wages rise). If millennials and Gen Z resume their pre-inflation trading-up habits, categories like single malts, Cognac, and craft tequila could surge again. Under these conditions, Diageo’s large Scotch and tequila businesses would thrive, and Pernod’s Martell cognac could return to growth. Additionally, an easing of input cost inflation in an upside scenario would allow price increases to flow more to the bottom line, yielding margin expansion above guidance (possibly +80–100 bps annually for a couple years). The upside case could also be bolstered by any major strategic moves – e.g. if Pernod sells the wine division and buy back shares with proceeds, that would boost EPS; or if Diageo were to acquire a fast-growing brand in an accretive deal. While we don’t explicitly assume M&A, these companies have a history of bolt-ons that add 0.5–1.0% to growth. Thus upside could be partly inorganic. All told, the upside scenario depicts a return to the consistent growth of the 2010s: both firms delivering ~+6% organic sales and ~+9% organic EBIT growth, which would likely lead to significant share price appreciation given where valuations are now.
3.4 Near-Term Consensus vs. Our View (Next 12–18 Months):
FY2025 Outlook: Current street consensus for the next 12 months has been reset lower following recent guidance updates. For Diageo, consensus (per company-compiled analyst estimates) is looking for low-single-digit organic net sales growth (~+2% for FY25) and a similar low-single-digit EBIT growth, reflecting the expectation of a mild second-half improvement (Diageo withdraws medium-term sales forecast | WTVB | 1590 AM · 95.5 FM | The Voice of Branch County). For Pernod Ricard, consensus now anticipates about a -1% organic sales decline in FY25 and roughly flat profit (Consensus as of January 13th 2025 | Pernod Ricard) (Consensus as of January 13th 2025 | Pernod Ricard), aligning with the company’s lowered outlook. We believe Diageo’s consensus may still be slightly optimistic, whereas Pernod’s consensus is achievable (possibly even a bit conservative) given recent trends:
Diageo: After a +1% organic sales gain in H1 FY25 (Diageo withdraws medium-term sales forecast | WTVB | 1590 AM · 95.5 FM | The Voice of Branch County), analysts expect H2 to accelerate to ~+3%. We see risk that the U.S. market improvement might be slower and that price/mix could be weaker if the company chooses to push volume (promotions) to aid re-stocking. Additionally, any impact of U.S. tariffs (should they materialize fully on imports of Scotch/Irish whiskey) could shave a percent off second-half growth. Therefore, our FY25 estimate for Diageo is slightly below consensus at ~+0 to +1% organic sales (vs. ~+2% cons.) and flat EBIT (vs. ~+2–3% cons.). We think consensus might underestimate ongoing pressure in North America and overestimate a quick China bounce. However, these differences are not huge – essentially, we are a touch more cautious, but not drastically.
Pernod Ricard: The consensus of -1% sales for FY25 (Consensus as of January 13th 2025 | Pernod Ricard) implies H2 organic sales about +2% (since H1 was -4%). We are in agreement that Pernod can likely deliver a small uptick in H2 given easier comps and signs of improvement in the U.S. and India. China remains the wild card – we assume China stays negative in H2 but less bad than H1’s -25%, maybe ~-10%, which could allow total company sales to be flattish in the half. Pernod management itself seems fairly confident that H1 was the trough in China (H1 FY25 Sales and Results | Pernod Ricard) (H1 FY25 Sales and Results | Pernod Ricard). Moreover, consensus expects operating profit roughly flat or down slightly (-1 to -2%) – Pernod may outperform this if it maintains tight cost control (they managed to expand margin in H1 despite sales drop (H1 FY25 Sales and Results | Pernod Ricard)). We think consensus profit is reasonable, perhaps slightly low, as FX will turn from headwind in H1 to neutral/tailwind in H2 (per company, H2 FX should improve vs H1 (H1 FY25 Sales and Results | Pernod Ricard)). So in Pernod’s case, we see a chance to meet or modestly beat the very depressed FY25 expectations.
In summary, investor expectations for the next year are now subdued, and rightly so. We caution that for Diageo, consensus might not fully reflect risk of prolonged U.S. softness – thus there’s some chance of a minor miss or need for continued cautionary commentary. For Pernod, expectations have likely swung too pessimistic (with sales decline already priced in), so surprise could be to the upside if China or other regions even marginally improve. Both companies have emphasized H2 weighting this year, so a lot rides on the back-half 2025 performance. We will get clearer signals in their upcoming interim results and management commentary on sell-through trends.
Beyond the next 12 months, consensus (FactSet or similar) generally calls for Diageo and Pernod to return to ~+5% organic growth and high-single-digit EPS growth by calendar 2026 – essentially our base case. We think those medium-term consensus numbers are reasonable, though perhaps on the high side for Pernod if China recovery underwhelms. Conversely, if the cycle turns more favorably, there is upside to those estimates as discussed.
4. Valuation Analysis
The recent pullback in spirits stocks has compressed valuations to levels not seen in years. We examine Diageo and Pernod Ricard’s current valuation multiples in context of their history and relative to peers in the global beverage sector. We also assess upside/downside scenarios for valuation re-rating.
Current P/E vs. Historical: Diageo trades at approximately 16–17× trailing P/E (and similar forward P/E ~16× based on lowered earnings forecasts) (Diageo PLC, DGE:LSE summary - FT.com - Markets data) (Diageo plc (LON:DGE) Statistics & Valuation Metrics - Stock Analysis). This is below its 5-year historical average in the low-20s and the stock’s peak multiples of ~25× during bullish periods. Pernod Ricard’s stock similarly trades around 17–19× trailing earnings (depending on the earnings normalization) (PDRDF (Pernod Ricard) PE Ratio (TTM) - GuruFocus) (Pernod Ricard | RI - PE Price to Earnings - Trading Economics), compared to mid-20s averages in recent years. Both stocks have de-rated significantly over the past 18 months as growth slowed – for instance, Pernod’s P/E was ~23× at end of 2022 (Pernod Ricard (RI.PA) - P/E ratio - Companies Market Cap), now under 18× (PDRDF (Pernod Ricard) PE Ratio (TTM) - GuruFocus). On an EV/EBITDA basis, they stand near ~12×, down from ~15×+ highs. Dividend yields have consequently risen: Diageo yields ~3.7% and Pernod ~2.5%, which provide support. The valuation compression reflects investor skepticism about near-term growth, but it also indicates potential value if growth normalizes. We note that these multiples are now at a discount to the broader Consumer Staples sector (global staples index ~19×) and roughly in line with diversified beverage peers – a stark change from a premium valuation the spirits sector typically enjoyed for its superior growth.
Relative Valuation (Diageo vs. Pernod): The two trade at very similar multiples currently, implying the market perceives comparable risk/reward. Historically Diageo often had a small premium due to its larger scale and U.K. listing (more liquidity). Now, with both around 17× forward earnings, we’d argue Pernod looks slightly cheaper on a growth-adjusted basis, since Pernod’s FY25 earnings are depressed by China (and could rebound). However, Pernod’s extra emerging-market risk likely justifies no higher multiple until evidence of recovery.
Peer Comparison: In the spirits space, Campari (CPR IM) and Rémy Cointreau (RCO FP) are two direct peers. Campari, with a portfolio of aperitifs and spirits, historically traded at a premium (high-20s P/E) due to its steady growth, but after a recent sell-off trades around 27× trailing P/E (and ~17× forward) (Davide Campari-Milano (CPR.MI) - P/E ratio - Companies Market Cap) (Davide Campari-Milano PE Ratio Analysis - YCharts) – still richer than Diageo/Pernod on current earnings. Rémy Cointreau, heavily China-exposed, has seen its P/E drop to ~17× TTM (Heineken PE Ratio 2010-2024 | HEINY - Macrotrends) as its earnings fell sharply (-16% sales in H1) ([PDF] half-year financial report 2024/2025 - Rémy Cointreau). Rémy is thus roughly on par with Diageo/Pernod now, whereas it used to trade at a premium >30× when China was booming. Among broader beverage alcohol companies: Heineken and Carlsberg (global brewers) trade at roughly high-teens to low-20s P/E on normalized earnings (though current trailing figures are distorted by one-offs) (Top alcoholic beverage companies by P/E ratio) (Top alcoholic beverage companies by P/E ratio). For example, ABI (AB InBev) is ~17× (Top alcoholic beverage companies by P/E ratio), Carlsberg ~18×, and Heineken ~20× (forward ~14× as earnings recover) (Heineken | HEIA - PE Price to Earnings - Trading Economics). Thus Diageo/Pernod are in line with beer giants on P/E, despite typically delivering higher margins and historically higher growth than brewers. This suggests a relative undervaluation of spirits at the moment. Another peer is Brown-Forman (Jack Daniel’s producer), which trades around ~20× P/E (Top alcoholic beverage companies by P/E ratio) (Top alcoholic beverage companies by P/E ratio) – a premium likely for its U.S. focus and stability. In summary, the current valuation landscape is unusual: normally one would expect Diageo/Pernod to command a premium to beer and in line with high-end spirits like Rémy, but instead they are roughly on par or even cheaper in Pernod’s case. If and when growth outlook brightens, we would expect a re-rating upward.
Sum-of-Parts Consideration: Pernod’s possible divestment of its wine/champagne business (which has lower multiple) could itself lift its P/E by focusing the mix on spirits. Diageo’s broad portfolio doesn’t have obvious separable parts now (they’ve already shed most non-core), but it’s worth noting Guinness (beer) might carry a slightly lower multiple than spirits business – however, that’s ~10-15% of sales so not a huge drag.
Risks to Valuation (Downside): If industry conditions remain tough or worsen, there is a risk of further de-rating. In a severe downside scenario (stagnant earnings), these stocks could trade closer to 12–14× P/E, more akin to slow-growth food & bev companies. For instance, if Diageo were perceived as an ex-growth company, its multiple could approach that of a beer company in secular decline. Additionally, if interest rates stay higher for longer, equity risk premiums could rise, compressing valuations for defensives. One specific downside risk: ESG or regulatory pressures could introduce a “sin stock” discount – though alcohol has largely avoided that fate compared to tobacco, any moves like drastically higher taxes or advertising bans could make investors demand a higher risk premium. Another risk factor: FX – a significant strengthening of GBP (for Diageo) or EUR (for Pernod) against other currencies would lower local-currency earnings and possibly confuse the valuation picture (making P/E look higher). Finally, if either company were to make a major acquisition at an expensive price, that could dilute returns and hurt the multiple (this seems unlikely near-term given focus on organic recovery). Our view is that the downside valuation risk is limited by the already low multiples and strong cash generation – yield support and the potential for share buybacks (Diageo resumed buybacks in 2023 (Diageo : 2023 Preliminary Results, year ended 30 June 2023 -August 01, 2023 at 04:10 am EDT | MarketScreener) (Diageo : 2023 Preliminary Results, year ended 30 June 2023 -August 01, 2023 at 04:10 am EDT | MarketScreener)) provide a backstop. It’s also notable that spirits assets are attractive – if valuations fell too low, one could even imagine consolidation or activism (though Ricard family stake shields Pernod somewhat).
Upside Potential (Re-rating): Conversely, if Diageo and Pernod demonstrate a clear return to growth and dispel current worries, their P/E multiples could expand back toward historical norms or beyond. A re-rating to, say, 20× forward earnings within 1-2 years is feasible if investors regain confidence in mid-single-digit organic growth and high-single-digit EPS growth. That would imply roughly a 20-25% upside in share price from current levels, before considering any earnings growth – effectively a double tailwind if earnings also rise. Additionally, relative valuation should improve: if global macro stabilizes, investors may once again favor the higher quality growth of spirits companies relative to beer or broad staples, restoring some premium. It’s worth noting that in low-rate environments, these stocks traded at 25×+; while we don’t count on a return to that extreme, even splitting the difference between now and then yields significant upside.
Peer vs Peer – Diageo vs Pernod valuation: At current prices, both are attractive, but one could argue Pernod has more upside if China recovers (since Pernod’s earnings are more depressed and the stock punished more, any improvement in that narrative could boost both earnings and the multiple disproportionately). On the other hand, Diageo’s U.S.-heavy mix might appeal more if the U.S. avoids recession (less reliance on China). Thus, some investors might favor one over the other depending on their macro view. For broad exposure, holding both is reasonable – they trade roughly in line, so it’s more about fundamentals than arbitrage at this point.
In terms of EV/EBITDA and EV/Sales, Diageo is around 4.5× EV/Sales, Pernod ~4.2×; Campari ~5×; beer comps ~3–4×. These also tell a similar story of spirits at only a minor premium to beer.
Downside/Upside Risks to Valuation Summary:
Downside: Further earnings disappointments or macro shocks could compress P/Es to low-teens, implying perhaps -20% stock downside from here in a pessimistic case. Also, sustained high interest rates could limit multiple expansion.
Upside: Successful navigation of the headwinds and a return to steady growth could re-rate stocks to ~20×+, delivering +20-30% valuation-driven upside. Any outperformance of growth (i.e. upside scenario) could push that even higher (mid-20s P/Es not impossible if growth surprises to the upside and/or if global equities rally and risk premiums fall).
We think the risk/reward skews favorably: valuation is undemanding and provides a margin of safety for long-term investors, while upside optionality is significant if the companies even approach their historical performance levels.
5. Investment Recommendation
After weighing the industry outlook, company fundamentals, financial forecasts, and valuation metrics, we recommend the following:
Diageo (DGE LN) – Buy (Outperform): We believe Diageo’s stock offers an attractive entry point for long-term investors, as near-term headwinds in North America are already reflected in the de-rated valuation, while the company’s durable strengths remain. Diageo’s diversified premium portfolio and track record of execution position it to resume solid growth as the macro environment improves. Trading at ~16× forward earnings (below historical average), the stock provides ~3.7% dividend yield and potential for ~15-20% upside as earnings recover and the P/E re-rates. Key catalysts over 12 months include a stabilization of U.S. trends (evidence that de-stocking is over and consumer demand holding up) and any improvement in Asia (even a slight uptick in China would be a sentiment booster). Fundamentally, Diageo’s strong free cash flow and shareholder returns (resumption of buybacks) add to the investment case. Risks: If U.S. consumer spending dips into recession or if inflation necessitates further price hikes that hurt volume, Diageo’s recovery could be delayed. Tariff uncertainties and a slow rebound in China are also risks to monitor. However, we see these risks as manageable and largely priced in. On balance, the upside from a return to 5%+ organic growth over the next couple years and multiple expansion supports a Buy.
Pernod Ricard (RI FP) – Buy (Outperform): We also recommend a Buy on Pernod Ricard, acknowledging that it carries higher short-term risk but also potentially higher reward. Pernod’s shares have lagged due to the China-driven downturn, but investor expectations are now reset (FY25 consensus now assumes a sales decline (Consensus as of January 13th 2025 | Pernod Ricard)). We think the current price (~€100, ~18× earnings) represents an attractive risk/reward for a company with Pernod’s brand equity and emerging market footprint. Our 12-month price target (based on ~20× forward EPS) implies roughly 20-25% upside. The thesis relies on China finding a floor – we don’t even need a full rebound within 12 months, just stabilization at a low-single-digit decline rather than the steep double-digit drops (Pernod reports sharp -26% sales drop in China - Drinks International). Concurrently, Pernod’s other growth engines (India, Global Travel Retail, Africa, tequila/mezcal in the U.S.) are expected to continue delivering. If evidence emerges in coming quarters that China’s trends are improving or that destocking there is done, Pernod’s stock could rally significantly given how pessimistic sentiment has been. Additionally, any corporate actions (e.g. sale of non-core assets or increased share buybacks) would crystallize value. Risks: Pernod is more exposed if China’s economy or policy environment worsens – another leg down in Chinese consumption would further hit earnings. The company also has to contend with competitive battles in key categories (vodka, Cognac share in the U.S. etc. as discussed). Nonetheless, Pernod’s diversification across brands and geographies should buffer some China risk, and its strong balance sheet gives it resilience. With a longer-term view, Pernod is poised to benefit disproportionately from a revival of emerging market growth, which we expect will eventually occur. Thus, we see current levels as an accumulation opportunity.
In summary, we recommend Buying both Diageo and Pernod Ricard for a 12+ month horizon, expecting each to outperform the broader market. While the next couple of quarters may remain choppy, we advise institutional investors to position ahead of the anticipated recovery in FY2026 and beyond. The spirits sector’s fundamental appeal – high margins, brand loyalty, and secular premiumization – is intact, and these two leaders are best in class to capitalize on it. Trading at valuations near decade lows, the risk/reward skews favorably. We acknowledge the challenging external environment, but view it as a cyclical setback rather than a structural decline in global spirit consumption. Therefore, we see current weakness as an opportunity to build positions in Diageo and Pernod Ricard, with the expectation of improving earnings trajectory and multiple expansion driving solid 12-month total returns.
***Disclaimer: Seriously! It might look like investment research, but this is definitely NOT investment Research and should NOT be relied on for any investment decisions. This is a thought experiment to see how OpenAI’s Deep Research would stack up compared to real investment research. I did not edit anything in the report generated by the AI. The numbers could be wrong, and the facts could be wrong.***
Second-shot prompt to get a better report
As I mentioned in my thoughts above the AI-generated report, I thought there were issues with the data points leveraged that were old and a missing topic. So, I am giving the GPT feedback to see if it can improve.
Prompt: This is great work. I have some feedback. 1) I noticed a lot of references to older data points, including those sourced from 2023FY reporting from Diageo and Pernod. Keep in mind they report on a June fiscal year end, so those data points are 18 months old. Institutional investors and the market overall would want the most recent data points possible since the old data is already factored into the share price. Can you rewrite this, prioritizing data points in the last 6 to 12 months? 2) I can't help but notice that a recent development that's been discussed in the press is missing. There are potential tariffs from the US on Mexican imports. I don't see this discussed as a risk for the tequila businesses of Diageo and Pernod Ricard. 3) In the pyramid principle applied to institutional investment research, it’s important to include in the initial executive summary the key investment debate the market cares about, the view of the report compared to consensus, including up front along with the key supporting points explaining the difference. The executive summary should include the ratings/outlook covered in the report and a discussion of the valuation method to get to the target price, along with a brief assessment of risks to the view and a brief summary of the scenario analysis.
🤖ChatGPT o3-Mini Deep Research:
Got it. To ensure the research is as relevant as possible for institutional investors, I will:
Prioritize the most recent data points (last 6-12 months), avoiding outdated references from FY23 unless absolutely necessary for historical context.
Incorporate discussion on the potential U.S. tariffs on Mexican imports, particularly the risk to the tequila businesses of Diageo and Pernod Ricard.
Refine the executive summary to:
Clearly outline the key investment debate in the market.
Explicitly state how our view differs from consensus and why.
Include ratings and target price methodology.
Provide a concise assessment of valuation, key risks, and scenario analysis up front.
Before I proceed with the revision, could you clarify how you’d like me to approach the target price calculation? Should it be based on a 12-month forward P/E multiple, a blended valuation approach (EV/EBITDA, DCF, peer multiples), or do you have a specific preferred valuation framework for institutional investors?
Prompt:I liked the way the valuation was done in the report, touching on a few relative multiples compared to peers and history. The important thing is that the numbers used in the valuation are logically consistent and anything that’s factually observable is 100% accurate.
🤖ChatGPT o3-Mini Deep Research:
Understood. I will refine the research report to focus on the most recent data from the last 6-12 months, incorporate the risks related to potential U.S. tariffs on Mexican imports (impacting Diageo’s and Pernod Ricard’s tequila businesses), and enhance the executive summary with a clear articulation of the key investment debate, comparison to consensus, ratings, target price methodology, valuation framework, and scenario analysis.
I will ensure that all valuation multiples are logically consistent and factually accurate, aligning with the latest data points from company filings, earnings reports, and market sources. I will return with the revised research report shortly.
Another 7 minutes and another 25 sources later we have a new draft to review…
Assessment of report try #2: The report now has a major error. Need to reprompt it.
As I take notes on what I’m seeing in the revised report, the first thing I notice is an improved report summary that is more like a sell-side research report that leads with conclusions.
Something surprising happened as well. Perhaps in framing the report this way, along with focusing on more recent near-term data points, the AI “changed its mind” and went with a neutral rating for Pernod (in report #1, the AI decision was to put Pernod on a buy rating). It also added the phrase “we upgrade to buy” to describe it’s Diageo view. Hilarious! It wasn’t covering the company before this exercise.
Scanning the new version, I see it properly includes a discussion of tariffs as a risk, as requested.
But there’s a new big problem: AI completely miscalculated Pernod’s target price. It set it at €200—double the actual ~€100. Worse, it believed the current stock price was already at €185, a glaring error.
After a bit of back and forth with the AI to try to understand why it chose that price, I gave up. It is simply pattern matching to generate the most likely output that will generate a positive response; it doesn’t know what it is actually doing; it just pattern matches and gives responses to prompts. Frankly, it was a bit annoying to have it try to explain that it was right despite me showing images and links of a quote from Bloomberg.com to the contrary!
Score one point for human analysts vs the machines—AI still needs oversight!
I’m not going to waste your time scrolling through version 2, I’m going to have it redo it. As always, it’s important to have a human in the loop when working with generative AI. The machine can’t currently do the sell-side job alone. It is also heavily dependent on the quality of the prompts.
Prompt: Please rerun the report. When considering the current price of Diageo in GBP and Pernod in EUR, please use reputable sources like Bloomberg, Reuters, or other trusted sites; even Google Finance or Yahoo Finance will have good information. Similarly for the consensus estimates and valuation references in news and commentary sources, please cross-reference information to reputable sources for anything that is verifiable. Always check that the information is internally consistent and logical, especially when presenting information to institutional investors.
🤖ChatGPT o3-Mini Deep Research:
Understood. I will rerun the research report ensuring that the current share prices for Diageo (GBP) and Pernod Ricard (EUR) are sourced from reputable financial sources such as Bloomberg, Reuters, Yahoo Finance, or Google Finance. I will also cross-reference consensus estimates and valuation multiples using trusted sources to ensure accuracy and internal consistency. The revised report will prioritize logical coherence, making sure all valuation conclusions align with the latest available data.
This time it took a bit longer to reason through this at 8 minutes, leveraging 23 sources.
Assessment of report try #3: Structure, logical consistency, accuracy seem much better
The first thing I see in the report below is that it’s now written as an initiation report7 instead of continuing coverage. The structure of the report is much more commercial after reflecting my prompt to put specific information in the executive summary.
However, it’s now missing stating its target price specifically, which I guess in the prompt I never said it needed to include. One could imagine creating a custom GPT that generates average sell-side quality research by fine-tuning it to include the key components and providing it training on the importance of data points, especially if there are officially validated, trusted internal sources to prioritize (thinking about sell-side firms that compete based on their platform strength in particular).
It seems like it’s taking the consensus view on valuation. It seems like its reasoning approach is comparing the upside of Diageo and Pernod and seeing Diageo’s consensus view has a higher upside than Pernod it decided to put Pernod on neutral.
Effectively, it’s another average sell-side research report that’s more commercially written than before, but still just taking the consensus view after gathering facts. The arguments below are effectively the consensus view for the companies, which are both consensus buys according to websites that track consensus estimates and ratings.
Does the report have errors? It seems like the figures are all internally consistent. There’s not a model underneath this work, so it heavily references the consensus figures available online and commentary from the companies to generate the historical figures. If one really wanted to publish this as research and not a thought exercise, a human-in-the-loop would need to double check every figure for themselves. A better model would be to supply the key figures to the AI and it would generate an accurate report.
Would I write a report like this? No. It’s still describing the current situation and then taking a consensus view on the future. It is not creating a proprietary analytical lens to reveal new insights for investors.
Could this pass as average sell-side research? Yes. Especially since the errors seemed to be reduced with improved prompting. Some of the weaknesses of report versions one and two were user errors in my initial prompts.
Below is the final version of the report from OpenAI’s Deep Research, unedited.
***Disclaimer: Seriously! It might look like investment research, but this is definitely NOT investment Research and should NOT be relied on for any investment decisions. This is a thought experiment to see how OpenAI’s Deep Research would stack up compared to real investment research. I did not edit anything in the report generated by the AI. The numbers could be wrong, and the facts could be wrong.***
🤖ChatGPT o3-Mini Deep Research:
Take 3: Equity Research Report on Diageo and Pernod Ricard
Executive Summary
Recommendation: We see attractive long-term value in the global spirits leaders Diageo and Pernod Ricard after recent share price declines, but we favor Diageo for its resilience. We initiate Buy on Diageo plc (DGE) and Neutral on Pernod Ricard SA (RI). Both stocks trade near 52-week lows – Diageo at 2,190 GBp (London; ~£21.90) (Diageo PLC, DGE:LSE summary - FT.com) and Pernod at €99.20 (Paris) (Pernod Ricard SA, RI:PAR summary - FT.com) – following ~30–40% drawdowns from last year’s highs (Diageo PLC, DGE:LSE summary - FT.com) (Pernod Ricard SA, RI:PAR summary - FT.com). This selloff has driven valuations to multi-year lows well below historical averages, despite consensus expecting a return to growth over the next 12–24 months. The key debate for investors is whether these companies can reaccelerate organic growth after a period of destocking and macro headwinds. Our view is that the headwinds (U.S. inventory corrections, a China slowdown) are cyclical, not structural, and both firms should see improvement by late 2025. Diageo’s diversified portfolio (scotch, tequila, beer, etc.) and stronger recent execution in the U.S. give us confidence it can outperform consensus, warranting a Buy with ~20% upside potential. Pernod Ricard offers a higher dividend yield and cheaper valuation, but near-term uncertainty (especially in China) tempers our enthusiasm – we see its risk/reward as balanced, justifying a Neutral stance. We outline base, bull, and bear scenarios: in our base case, modest sales acceleration and stable margins drive mid-teens total returns; our upside scenario (faster rebound and multiple rerating) suggests >25–30% share price upside; downside risks (prolonged demand weakness or U.S. tariffs on Mexican imports hitting tequila) could see another ~15% decline. Overall, while both companies remain quality defensive franchises in a growing industry, we prefer Diageo for its greater earnings visibility and multiple growth catalysts, and we await clearer signs of inflection at Pernod before turning more positive.
Consensus Expectations: Street estimates reflect a subdued near-term outlook followed by improvement. For the next 12 months, consensus models essentially flat to low-single-digit organic revenue growth as the firms lap the downturn. Pernod Ricard has guided to a “low single digit decline” in organic sales for FY2024/25 (year to June 2025) (Pernod Ricard: revised outlook for 2024-25 and beyond -February 06, 2025 at 03:32 am EST | MarketScreener), implying H2 will be roughly flat to slightly up (an improvement vs. H1’s -4%). Diageo has withdrawn formal medium-term guidance given the uncertainties (Interim results | Company Announcement | Investegate), but analysts similarly expect only modest growth in FY2025. Looking further out, the sell-side anticipates a reacceleration by FY2026–27. Pernod management itself forecasts organic sales growth returning to +3–6% annually from FY2026/27 onward (Pernod Ricard: revised outlook for 2024-25 and beyond -February 06, 2025 at 03:32 am EST | MarketScreener). This aligns with the consensus view that industry growth will normalize in the mid-single-digit range longer-term, once transient drags abate. On earnings, current consensus is for a dip or stagnation in FY2025 EPS (due to weak sales and forex impacts) followed by a rebound in FY2026. For example, analysts project Pernod’s EPS to decline in FY25 then grow ~+17% in FY26 as sales recover and margins stabilize (Pernod Ricard: Financial Data Forecasts Estimates and Expectations | RI | FR0000120693 | MarketScreener). Diageo’s consensus EPS is roughly flat over the next 12 months, then accelerating to high-single-digit growth beyond. Our own view is generally in line on the trajectory – we see FY2025 as the trough year for organic profit growth, with momentum building into calendar 2026 as the U.S. clears excess inventory and China’s consumer demand gradually improves. The key variance in our forecasts is that we expect Diageo to outperform these consensus growth rates slightly (we model ~+5% organic revenue CAGR over the next two years vs. ~+3–4% consensus) while we are more cautious on Pernod (modeling ~+3% CAGR, in line with consensus mid-point). This informs our differing stock calls, as discussed below.
Consensus Price Targets: The market’s skepticism has already started to ease slightly – both stocks have majority “Buy/Outperform” ratings in sell-side surveys (Pernod Ricard: Financial Data Forecasts Estimates and Expectations | RI | FR0000120693 | MarketScreener) (Diageo plc: Financial Data Forecasts Estimates and Expectations | DGE | GB0002374006 | MarketScreener). The average target price for Pernod Ricard is ~€121.9 (Pernod Ricard: Financial Data Forecasts Estimates and Expectations | RI | FR0000120693 | MarketScreener), ~23% above the current €99 share price. Diageo’s average target is $32.50 for the U.S. ADR (≈ £25.60 for London shares), about 17% above the current price (Diageo plc: Financial Data Forecasts Estimates and Expectations | DGE | GB0002374006 | MarketScreener). These targets equate to forward P/E multiples still well below prior highs (roughly 18–19× for both, vs. >20× historically), indicating that analysts see upside even without full multiple mean-reversion. Our own valuation framework likewise finds the stocks undervalued in the base case (see Scenario Analysis). We note that Pernod’s larger discount suggests the market is assigning a penalty for its heavier exposure to currently weak segments (e.g. >10% of sales in China via Martell cognac) and possibly a conglomerate discount due to its lower liquidity and dual listing. Diageo, as a UK-listed company with U.S. ADR and higher free float, historically commanded a premium – now that premium is modest. In short, valuation is compelling for both: these are global consumer staples franchises now priced more like cyclical stocks. This underpins our positive stance on the sector. However, we believe Diageo deserves a higher multiple than Pernod given its stronger near-term growth and execution, and that informs our differentiated recommendations.
Key Debates and Investment Thesis
Debate #1: Can organic growth reaccelerate to mid-single digits? After a period of near-zero growth, a central question is whether Diageo and Pernod can return to their long-term algorithm of ~4–6% organic sales growth. We believe they can. Bulls argue that the recent slowdown was driven by temporary factors – namely, distributor destocking in the U.S. spirits market (following a post-pandemic inventory buildup) and a pandemic hangover in China – rather than a permanent decline in consumer demand. Spirits consumption trends remain favorable: premiumization continues (consumers trading up to higher-end brands), and emerging market demographics (rising middle class in Asia, Africa) support volume growth. Both companies cite confidence in “favourable industry fundamentals” over the medium term (Interim results | Company Announcement | Investegate). Diageo’s CEO highlighted that Spirits remains an attractive sector with a long runway for growth and that Diageo expects to keep gaining share of total beverage alcohol (Interim results | Company Announcement | Investegate). Bears, on the other hand, worry that growth might stay muted: inflation-weary consumers could downtrade or drink less, China’s recovery is uncertain, and the spirits boom of 2020–2021 (especially in U.S. whiskey/tequila) may have pulled forward demand. There are also category-specific concerns – e.g. is the U.S. whiskey market saturating? Will cognac demand in China revive or has tastes shifted? These questions form a debate on the sustainability of past growth rates.
Our view: We side with the bulls that the current headwinds are largely cyclical. For example, U.S. spirits retail sales are still slightly growing (~+1% including ready-to-drink cocktails) even as wholesalers reduced inventory (H1 FY25 Sales and Results | Pernod Ricard). Pernod’s U.S. de-stock caused a -7% sales drop in H1, but its sell-out (end consumer offtake) was roughly -6% and improving in the Oct-Dec quarter (H1 FY25 Sales and Results | Pernod Ricard). This suggests underlying consumer demand in the U.S. is holding up, and inventory levels should normalize in coming quarters, removing a drag on reported sales. In China, while the recovery has been slow, we note that Pernod’s sales there were cycling very tough comparisons (the prior year rebound) and that the company expects continuing improvement in H2 (H1 FY25 Sales and Results | Pernod Ricard). We think China’s high-end spirits market (led by cognac and scotch whisky) will stabilize as economic stimulus feeds through – perhaps not an immediate V-shaped rebound, but a gradual return to growth by 2026. Importantly, neither company is standing still: both are increasing marketing and innovation to stimulate demand (e.g. new product launches in tequila, ready-to-drink cocktails, non-alcoholic variants), and both are leaning into faster-growth markets (India, Africa, Latin America). Pernod reported +6% growth in India in H1, with broad-based strength in whisky brands (H1 FY25 Sales and Results | Pernod Ricard), and it expects continued strong momentum there. This helps offset China weakness. Overall, we forecast Diageo and Pernod can resume ~4–5% organic revenue growth by FY2026, which is within the historical range and in line with the mid-point of management’s medium-term outlook (Pernod guides +3–6% beyond 2026 (Pernod Ricard: revised outlook for 2024-25 and beyond -February 06, 2025 at 03:32 am EST | MarketScreener)). Thus, our investment thesis is that the market’s growth fears are overdone – these companies are fundamentally solid with diverse global engines, and growth will likely revert to trend as transitory issues pass.
Debate #2: U.S. Spirits Momentum – Is Diageo better positioned? The U.S. is the largest profit pool for both firms (~35–40% of sales for Diageo, ~30% for Pernod). Within the U.S., the key growth category in recent years has been tequila and other premium agave spirits. Diageo has a major foothold in tequila (it owns Don Julio and Casamigos), whereas Pernod’s tequila portfolio is smaller (brands like Avión and Olmeca Altos). This has been evident in recent performance: Diageo noted momentum in Don Julio contributing to its North America growth (Interim results | Company Announcement | Investegate). The debate is whether Diageo’s stronger U.S. presence gives it a relative advantage in delivering growth. We believe yes – Diageo’s breadth (spirits categories plus Guinness beer) and route-to-market changes have enabled it to outperform in the U.S. (it gained share in ~65% of measured markets globally, including the US (Interim results | Company Announcement | Investegate) (Interim results | Company Announcement | Investegate)). Pernod has some strong U.S. brands (Jameson Irish whiskey continues to do well, and Martell cognac in Asian-American segments), but overall Pernod saw a bigger U.S. dip due to inventory reductions. Our outlook has Diageo’s U.S. business recovering faster than Pernod’s, contributing to our above-consensus earnings for Diageo. This underpins our Buy on Diageo – we expect its U.S. momentum (especially in tequila and American whiskey via Bulleit bourbon) to drive a quicker rebound. Pernod’s U.S. sales should also improve (Q2 already showed better sell-out trends (H1 FY25 Sales and Results | Pernod Ricard)), but perhaps not to the same extent if its brands lost some shelf space during the downturn. We will monitor Pernod’s U.S. trajectory; a clear pickup would be a positive swing factor for the stock.
Debate #3: China and Asia – Overhang or Opportunity? China’s downturn has been painful, particularly for Pernod which relies on Martell cognac for a significant portion of Asia revenue. In H1 FY25, Pernod’s China sales fell 25% (H1 FY25 Sales and Results | Pernod Ricard), dragging its Asia-Rest of World region to -5% despite growth in India and other Asia. Diageo’s exposure to China is relatively smaller (it sells scotch like Johnnie Walker and baijiu through Shui Jing Fang, but China is <5% of Diageo’s sales). Thus Pernod has higher risk—and also higher potential reward—in China’s recovery. If China’s premium spirits demand snaps back in late 2025, Pernod could surprise to the upside with outsized growth (given Martell’s leading position). Conversely, if China stays weak or if consumer preferences shift (e.g. towards local baijiu or wine), Pernod could continue to lag. We lean towards a gradual recovery scenario (no sudden snap-back, but improving trends by FY2026). That suggests Pernod’s China headwind will persist in the very near term, keeping its growth below Diageo’s in 2025, but then turning into a tailwind by 2026. This asymmetry is a reason we are Neutral on Pernod for now – the uncertainty around China justifies some caution despite the low valuation. However, we acknowledge that upside optionality exists: any evidence of a strong Chinese rebound (or more stimulus from Beijing) could meaningfully lift Pernod’s forecasts and share price. It is a key swing factor in our scenario analysis.
Debate #4: Margin and Cost Levers – Protect or Reinvest? Both companies have high operating margins (~27–30% EBIT margin historically). In the downturn, they’ve faced negative mix and cost inflation. A debate is whether margins will be maintained or whether they’ll need to reinvest more (marketing, capex) to reignite growth. In H1, Diageo’s organic operating margin fell ~69 bps (Interim results | Company Announcement | Investegate) as they continued to invest in overheads and kept advertising relatively high, though they did cut some marketing spend. Pernod impressively managed a slight operating margin expansion in H1 (organically +65 bps) despite lower sales, by rigorous cost control and phasing investments (H1 FY25 Sales and Results | Pernod Ricard). This indicates both firms are committed to protecting profitability even in a tough environment. We expect margins to be roughly flat in the base case (perhaps down ~50 bps for FY25, then recovering alongside volume growth). With inventory destocking easing, production volumes can normalize, improving fixed-cost absorption. Moreover, both companies undertook efficiency programs: Pernod achieved ~€900m of efficiencies since FY23 (H1 FY25 Sales and Results | Pernod Ricard), and Diageo likewise has supply chain savings underway. These should help offset inflation. The risk is if competitive pressures force significantly higher brand investment (for instance, upstart brands or American whiskey makers spending heavily could force Diageo/Pernod to respond). At this stage, we think that is manageable. Consensus sees EBIT margins holding or slightly improving by FY26, and we concur. In our upside scenario, modest margin expansion (boosted by mix shift to premium products) provides additional EPS leverage; in the downside scenario, margins could erode if sales disappoint or tariffs raise costs.
Our Calls – Buy DGE, Neutral RI: We recommend Buy on Diageo given its balanced global exposure and demonstrated resilience. The company navigated the recent slump relatively well (still growing sales, gaining share in the U.S.), which gives us confidence in its execution. Diageo’s broad portfolio (from Johnnie Walker scotch to Guinness beer to Casamigos tequila) and its investments in data/route-to-market position it to capitalize as conditions improve. At ~17× forward earnings and ~12× EV/EBITDA, the stock’s valuation does not reflect its high-quality business and consistent cash generation, in our view. Historically, Diageo has traded at a premium for stability; today it trades at a discount to the market and to its own history (Diageo plc: Market multiple valuation (DGE | GBR - Infront Analytics), creating an opportunity. We see ~20% total return potential (price upside + dividends) over 12–18 months as performance reaccelerates and the P/E moves back toward ~20×. In contrast, we rate Pernod Ricard Neutral despite its seemingly cheaper valuation. Pernod is a strong company with excellent brands (Absolut vodka, Martell, Jameson, etc.) and we do see value – the stock yields ~4.5% and trades ~14× earnings, a level that embeds a lot of bad news. However, we think that valuation is warranted by its near-term growth uncertainty. The company itself expects an organic sales decline this fiscal year (Pernod Ricard: revised outlook for 2024-25 and beyond -February 06, 2025 at 03:32 am EST | MarketScreener), and the timeline for returning to, say, 5% growth is a bit longer (not until 2026 per guidance (Pernod Ricard: revised outlook for 2024-25 and beyond -February 06, 2025 at 03:32 am EST | MarketScreener)). Meanwhile, macro/geopolitical wildcards (e.g. China, and potential tariffs impacting tequila or other spirits) weigh more heavily on Pernod given its specific mix. As such, we see Pernod’s stock likely range-bound in the immediate term – it may lag Diageo if the sector recovers gradually, though it would likely catch up in a sharper rebound scenario. We would turn more positive (upgrade to Buy) if we saw either an acceleration in Chinese demand or evidence that U.S. trends are improving faster than anticipated for Pernod. For now, we believe a Neutral rating appropriately balances its 23% upside to consensus target (Pernod Ricard: Financial Data Forecasts Estimates and Expectations | RI | FR0000120693 | MarketScreener) against the risks and need for patience.
Risks & Scenario Analysis
While we have a constructive base case, investors should consider several key risks that could alter the investment outcome:
Macro Downturn: As consumer-focused businesses, Diageo and Pernod are exposed to global economic conditions. A recession in the U.S. or Europe could dampen alcohol demand, particularly for higher-priced premium spirits. Consumers might shift to cheaper brands or reduce consumption frequency, hurting volume and mix. Similarly, emerging-market volatility (e.g. a sharper slowdown in China or currency crises in other countries) could impede the recovery. Forex fluctuations are also a risk – Pernod cited a €177m FX hit in H1 from emerging market currency weakness (H1 FY25 Sales and Results | Pernod Ricard). Further strengthening of GBP or EUR vs. local currencies would drag on reported results.
Tariffs and Trade Policies: A prominent risk is potential U.S. tariffs on Mexican imports, which would directly impact the booming tequila business. Both Diageo and Pernod import tequila from Mexico (Diageo’s Casamigos/Don Julio, Pernod’s Avión/Altos). Any tariff or border tax could raise costs or prices, crimping demand in tequila’s biggest market (the U.S.). Notably, Diageo’s management has already flagged concern here – in early Feb 2025 they noted confirmation of new U.S. tariffs could “impact…momentum” and add uncertainty to guidance (Interim results | Company Announcement | Investegate). We interpret this as a reference to possible U.S. trade measures affecting spirits (either directly on tequila or related to broader trade disputes). Beyond Mexico, there’s also a risk of EU-U.S. trade tensions (e.g. past threats of tariffs on spirits like Scotch whisky during unrelated disputes). While many of those were resolved, a flare-up could reintroduce tariffs on European spirits. We consider tariff risk a low-probability but high-impact scenario: if a significant tariff (~20%+) were imposed on a category like tequila or whiskey, it could force price hikes and hurt volumes in the affected market, reducing earnings for both companies’ U.S. divisions.
Competitive/Structural Risks: The spirits industry is oligopolistic, but competition from craft brands, local spirits, or other alcohol categories (beer, wine, ready-to-drink cocktails) is always present. If Diageo or Pernod misjudge consumer trends, they could lose share (e.g. the recent surge of celebrity tequila brands shows low barriers to entry in certain segments). Additionally, regulatory changes such as higher alcohol taxes or advertising restrictions in key markets would pose a risk. For example, some governments could increase liquor duties to raise revenue or discourage consumption, which might slow volume growth.
Execution Risks: Both companies are undergoing internal changes (Diageo’s new CEO is still relatively fresh, and the company is implementing a U.S. route-to-market transformation; Pernod is integrating acquisitions and driving efficiency programs). Execution missteps – such as distribution disruptions, inventory write-downs, or failed product launches – could impact performance. Diageo’s recent changes in the U.S. distribution system need to deliver the intended benefits; any hiccups could temporarily affect sales in that crucial market.
Scenario Analysis: We outline three scenarios (Downside, Base, Upside) to gauge the potential range of outcomes for each stock over the next 12-18 months, incorporating the risks above:
Downside Scenario:“Stalled Recovery”. In this pessimistic case, macro conditions worsen. Perhaps China’s economy stays weak (flat spirits demand), the U.S. falls into a mild recession causing consumer trading-down, and a new U.S. tariff of ~10-20% on Mexican alcohol imports is enacted – denting the tequila category significantly for a time. Under this scenario, Diageo and Pernod might see FY2026 organic growth still near 0% (no meaningful rebound). Margins could slip ~100 bps as operating deleverage and higher input costs (including tariff-related costs) bite. We estimate EPS would be 10–15% below current consensus in this case. Valuation might also compress further if investors fear a structural slowdown – say Diageo’s P/E goes to ~15× and Pernod’s to ~12× (near trough multiples). Estimated impact: Diageo’s stock could fall toward ~2000 GBp (roughly 15% down from current) and Pernod toward ~€85–90 (about 10–15% downside), plus both would still yield ~5% on dividends which might buffer total return slightly. This downside could materialize if, for example, U.S. tariffs are imposed and China’s recovery delays into 2027. (Probability ~20% in our assessment.)
Base Case:“Gradual Reacceleration”. This scenario reflects our core expectation and essentially aligns with consensus recovery forecasts. Here we assume the U.S. avoids recession (or has a soft landing) and inventory levels normalize by mid-2025, leading to resumption of modest growth in North America. China stabilizes in late 2025, contributing to FY2026 growth for Pernod. Overall, we model FY2026 organic sales growth ~+4% for Diageo and +3% for Pernod (with H2 stronger than H1), and further improvement to +5%/+4% in FY2027. Margins remain flat to slightly up as cost efficiencies offset inflation. In this scenario, Diageo’s FY2026 EPS grows high-single-digits (recovering the FY25 dip), and Pernod’s EPS grows low-teens (after a decline in FY25). If the market gains confidence in this outlook, we expect some multiple expansion from today’s levels – perhaps Diageo’s forward P/E moves back to ~18× and Pernod’s to ~15×, still below long-term norms but reflecting reduced uncertainty. Estimated impact: Diageo’s share price would approach £25–26 (GBp ~2500–2600), roughly in line with the consensus target (Diageo plc: Financial Data Forecasts Estimates and Expectations | DGE | GB0002374006 | MarketScreener), for ~15-20% upside plus ~3% dividend yield (total return ~18-23%). Pernod’s stock would likely move into the €115–125 range (approaching the €122 consensus target (Pernod Ricard: Financial Data Forecasts Estimates and Expectations | RI | FR0000120693 | MarketScreener)), yielding ~20-25% price appreciation plus ~4-5% dividend (total return ~25-30%). We consider this outcome highly plausible (Probability ~60%). It assumes no new major headwinds (tariffs are averted or minimal, and consumer demand gradually improves as anticipated).
Upside Scenario:“Accelerated Rebound”. In a bullish scenario, conditions improve faster and more strongly than expected. This could involve a combination of positive developments: e.g. China’s government stimulus sparks a sharp rebound in luxury spending by late 2025, fueling a significant uptick in cognac and whisky sales; the U.S. consumer proves very resilient with spirits demand accelerating (perhaps as inflation eases) and destocking turns into restocking by distributors; and crucially, no adverse tariffs materialize – in fact maybe trade tensions ease (allowing, say, the removal of an EU spirits tariff in India as a tailwind). Under this scenario, Diageo and Pernod could post above-consensus growth – perhaps ~+6–7% organic sales in FY2026, and mid-to-high single digits EPS growth aided by some margin expansion (as volumes come back strongly, fixed cost leverage improves). With renewed confidence, the market might re-rate the stocks closer to historical multiples: Diageo could return to ~20× forward P/E (still below its 21–22× pre-pandemic average, but a notable re-rating from 17× now), and Pernod to ~17–18× (given its higher growth in this scenario). Estimated impact: Diageo’s share price could rally to ~£28–30 (30%+ upside), and Pernod’s to ~€130–140 (30-40% upside). These levels would likely not be immediate but could be reached as investors start to price in FY2027 earnings momentum. Total returns including dividends could exceed 35% for both in this blue-sky case. (Probability ~20% – we view this as an attainable but optimistic case if multiple regions surprise positively.)
Risk/Reward Summary: Our base case yields healthy double-digit upside for both stocks, supporting a bullish bias. Even the downside scenario appears relatively limited in magnitude (thanks in part to already-low expectations and decent dividend support). Thus, the risk/reward skews favorably, especially for long-term investors in the spirits sector. Diageo’s profile in our view has slightly less downside (due to its diversification and stronger balance sheet) and solid upside – hence a clearer Buy. Pernod has higher beta to an upside scenario (its rebound could be sharper if China/U.S. surprises hit), but also marginally higher risk in the interim; thus, a more balanced Neutral for now. We will revisit our assumptions regularly as data on U.S. de-stocking, China’s trends, and any trade policy moves come in. In conclusion, we advocate owning Diageo as a core spirits holding at current valuations, and keeping Pernod Ricard on watch – it is a potential turnaround value play that could be very attractive once the clouds begin to clear.
All financial data and estimates are as of early 2025.
***Disclaimer: Seriously! It might look like investment research, but this is definitely NOT investment Research and should NOT be relied on for any investment decisions. This is a thought experiment to see how OpenAI’s Deep Research would stack up compared to real investment research. I did not edit anything in the report generated by the AI. The numbers could be wrong, and the facts could be wrong.***
Final Assessment of the OpenAI Deep Research-Generated Report
Would I have published a report of this quality?
I would like to think I would not have published something of this quality because it’s not actually moving the debate forward. I prided myself on the ability to take proprietary data and thoughtful analytics to uncover new insights on the most important questions. The AI-generated report does well to identify the key debates and commercially frame the investment opinions. It also backs up the analysis with facts and data points. However, it doesn’t actually take a novel analytic approach or attempt to generate a non-consensus view.
But, if I’m honest, perhaps there were times when I had a neutral rating on a company and needed to update my estimates and valuation, supported by facts. Having this AI tool would have been a great time saver to gather data and information and craft a draft report that I could have edited to better capture my views.
Have I seen sell-side research that is at this quality level?
Absolutely, yes. In my experience, the average sell-side analyst is able to craft a well-structured research report focused on the key debates, backed with facts and supporting information. However, the average sell-side report is not adding new insights and angles to the debate and instead is repeating the consensus views. From that point of view, I think the AI-generated reports would be passable as average sell-side research. With a bit of human-in-the-loop editing and fact-checking of the sources, the AI-generated report would meet the standard of an average sell-side report.
Concluding thoughts and call to action
OpenAI Deep Research’s ability to replicate desk research with structured, institution-grade sell-side reporting is impressive. In my opinion, this is in line with the “average” sell-side analyst research report. That’s not a small achievement.
What does this mean for sell-side research? It’s a risk and an opportunity.
It’s important to put this in context: the current AI capabilities are not as good as they will be in the future. That means it’s important for knowledge workers, like sell-side analysts, to start to learn how to collaborate with generative AI as soon as possible. It also means sell-side research firms need to start to think about how the sell-side research business model could change if generative AI is widely available to create average-quality sell-side research.
Both Star Analysts and Platform Strength: Firms that compete based on the strength of their platform and their star analysts can leverage generative AI at scale to amplify the impact of the strategy. Generative AI can be implemented as an enterprise-wide tool that provides scale across the platform to amplify star analysts’ ability to focus on their edge as a true expert in the industry, who advances their client’s thinking by finding opportunities when their non-consensus view is likely right. These firms would want the star analyst to remain in the decision-maker seat, providing their expertise to the analysis but leveraging generative AI to accelerate the creation of their non-differentiated parts of their work. This approach can also help star analysts take on more coverage via the scalable platform.
Platform Strength, Only: For firms that compete based on the strength of their platform, generative AI can be included in the suite of platform capabilities to enhance the ability of non-star analysts to stand out versus the competition. Generative AI can accelerate the report writing. An agentic framework8 can also further scale the analyst by providing analytic tools that generate financial models at scale as well as scaling the use of data to generate insights. These insights can then be fed into the Deep Research framework to generate proprietary insights that the analyst can leverage in their published reports. The leverage of an enterprise-enabled large language model with reasoning would allow the platform to pull from internal sources to improve the quality of data selected in the model.
Star Analyst Strength, Only: Star analysts that drive results under their own abilities, within minimal support from the platform of their company, should consider, with the blessing of their compliance department, using the public large language models to accelerate the desk research process. They would likely be limited to only entering requests that cover publicly available information. This can also help the analyst have a better sense of what the consensus is so they can focus on how they are different.
Neither Platform nor Star Analyst Strength: The research firms should reconsider this position by progressing into either the star analyst strength or platform strength approach because there will be a lot of human capital tied up in research creation activities that can be replicated with Open AI’s Deep Research tool. Of course, to do this, the research firm would need to acknowledge that their firm is currently in this quadrant as step 1.
AI Won’t Replace Analysts—But It Will Change the Game
The most important lesson? Sell-side analysts who embrace AI will thrive—those who ignore it risk being left behind. AI can’t replace human expertise, but it can eliminate time-consuming tasks and unlock deeper insights. The future of research isn’t AI vs. humans—it’s humans + AI working together to push the boundaries of financial analysis.
What do you think—can AI truly compete with sell-side analysts? If you’ve created or used investment research, I’d love to hear your take. Leave a comment below or email me directly.
And if you aren’t already subscribed yet, click below to recieve The Data Score directly to your inbox.
- Jason DeRise, CFA
Appendix:
Below is ChatGPT’s research log, tracking its thought process in real time. It seems like they borrowed from DeepSeek’s gimmick of having it narrate its thought process as if its human casually doing some work. This is still not AGI, but more of an agentic model that is doing some fine tuned tasks around generated research reports.
Also considering the references used, it raises the question of how the sources feel about their websites being referenced directly by OpenAI and included in the research.
Data vendors how would you feel about OpenAI Deep Research referencing your freely available data, blog posts, etc?
Here’s the unedited running log of its thoughts for both the first and third takes.
🤖ChatGPT o3-Mini Deep Research:
[Take 1] Diageo & Pernod Ricard Equity Research Report
ChatGPT
Gathering comprehensive data on industry dynamics, including macro trends, Diageo and Pernod Ricard. Evaluating financial forecasts, valuations, and investment recommendations.
Addressing headwinds like inflation and regulatory changes, while emphasizing tailwinds such as premiumization and emerging market growth. This progression considers sector demand and expanding fan bases.
Searched for premiumization trends in alcohol industry
ChatGPT
Noticing a rare decline in liquor sales in 2024, with a slowdown in top shelf demand. This shift is intriguing and could reflect broader economic changes.
I'm curious about the moderate decline in spirits off-premise, particularly in the US, and the strong performance of tequila and Canadian whisky. Non-alc sales are reaching nearly $1 billion, indicating a significant shift in consumer habits.
The U.S. spirits market is shifting to "affordable luxury" as premiumization slows. Sales are expected to decline by 5% in 2024, continuing into H1 2025.
Searched for Pernod Ricard China crackdown
ChatGPT
I’m curious about the evolving nature of the campaign against extravagant behavior, including luxury items and alcohol in official settings, and its progression since 2013.
I’m thinking about how the 2014 concept applies to 2025, exploring recent crackdowns or shifts in China’s nightlife and alcohol industry, and checking the latest updates for detailed insights.
OK, let's see. I’m wondering about a contemporary slowdown in China's high-end consumption, considering a 2023 crackdown or changes in the economic landscape.
Searched for China spirits demand 2023 slowdown
ChatGPT
I’m gathering information from WSJ, The Grocer, The Spirits Business, and CFO's Digital, focusing on China's trade impact on companies like Diageo, Pernod, and the influence of baijiu versus whiskey.
Diageo and Pernod are adjusting their growth forecasts due to the challenging economic backdrop, including concerns over US tariffs and consumer spending shifts.
I’m pulling together the net sales by region, breaking down Europe (23.8%), North America (39.3%), Asia/Pacific (19%), Latin America and Caribbean (9.1%), and Africa (8.8%).
Diageo's product family distribution is 78% spirits, 16% beer, and 4% RTD. By region, their FY2023 breakdown is 39.3% NA, 23.8% Europe, 19% Asia-Pac, 9.1% LatAm, and 8.8% Africa.
Searched for Pernod Ricard regional category breakdown
I’m analyzing various macroeconomic conditions to project 5-year revenue and profit growth, considering base, downside, and upside scenarios, with a focus on industry trends and consensus for each company.
I’m looking into Diageo's forecasted earnings and revenue growth rates from SimplyWallSt, and cross-checking these against Reuters' mention of Ivan Menezes' growth target.
Diageo's mid-term growth target withdrawal highlights external challenges like US tariffs and a digital tax dispute, affecting guidance and consensus expectations.
Searched for Pernod FY25 consensus growth
ChatGPT
OK, it looks like the company's site is gathering analyst consensus as of January 13th, 2025.
I'm thinking through whether the consensus for FY25, which anticipates a slight decline in revenues and profits, is too high or optimistic, especially considering potential headwinds and the current economic environment.
Searched for Diageo stock price P/E ratio
ChatGPT
I’m looking at Diageo's P/E ratios across different sources, seeing values between 15.53 and 21.23, indicating it might be at a multi-year low.
Searched for Pernod Ricard P/E history
ChatGPT
I’m focusing on Pernod Ricard’s P/E ratios, comparing it to Diageo and beer companies like AB InBev, Heineken, Carlsberg, Campari, and Remy Cointreau. This helps assess relative valuation and market trends.
Searched for Campari, Remy Cointreau, Heineken P/E 2024
ChatGPT
I’m curious about Heineken's high P/E ratio, possibly due to transitional earnings or a COVID impact. Remy's low P/E might reflect a price drop following earnings success and China issues. Campari's P/E is likely around 30.
I'm analyzing the P/E ratios from the ranking page, noting AB InBev, Brown-Forman, Kweichow Moutai, and Molson Coors. Discrepancies and anomalies in data fetching are causing some "N/A" entries.
Searched for Heineken P/E 2024
Searched for Campari Group P/E 2025
ChatGPT
I'm exploring economic downturn risks, currency fluctuations, regulatory impacts, and consumer trends for these alcohol companies.
I’m examining the share price drop amidst guidance cuts and considering macro and regulatory headwinds, balanced by tailwinds like premiumization and emerging markets.
Searched for glass bottle shortage in spirits 2023
ChatGPT
I'm emphasizing the high cost of inputs and packaging shortages while recognizing ongoing premiumization in the beverage market as a significant trend.
Emily Neill analyzes premiumization's recent slowdown due to economic pressures, while emphasizing its structural resilience. She highlights China's shifting value dynamics and burgeoning high-end spirits markets in emerging Asia.
I’m looking at the combined growth of beer and spirits, consumer shifts towards non-alcoholic options, and examining regional performances and financial forecasts.
I’m examining Diageo and Pernod Ricard's valuation multiples, comparing them to peers, and assessing downside and upside risks. Additionally, I’ll make an investment recommendation with concise justifications.
I’m piecing together the financial impacts from US and China markets, emerging market currencies, and expected H2 FX stabilization.
I'm verifying if the information is accessible without a subscription.
I’m examining Heineken's trailing P/E ratio and comparing it to forward P/E, noting a potential rebound. Meanwhile, spirits companies typically trade at higher multiples than beer companies.
[Take 3]: Updated Diageo & Pernod Ricard Equity Research Report with Verified Data
ChatGPT
I'm digging into equity research reports on Diageo and Pernod Ricard, focusing on their latest share prices, consensus estimates, valuation comparisons, market debates, and risks.
I’m thinking about opening the image in a browser to reveal text content or applying OCR to extract data from it.
I’m examining alternatives for extracting text from a binary image file, considering OCR and web searches for current share prices.
Searched for Diageo share price LSE
ChatGPT
Pulling together details on Diageo's share price on 20 Feb 2025, noting a possible Friday close around 21.90 GBP.
Searched for Pernod Ricard share price Euronext
ChatGPT
I'm checking stock prices and comparing them with high and low values to understand current trends. This approach helps me gauge the overall market movement and potential future directions.
I’m analyzing Diageo PLC's stock performance, noting it closed at 2,190 GBp, 4.36% above its 52-week low. Comparatively, it dropped about 28% from its 52-week high.
MarketScreener unfolds intricate dynamics, particularly around line 1398. The table here is dense, covering net sales, net income, and currency conversions for 2025 and 2026.
Weighing Diageo and Pernod's market range: Diageo's US tequila appeal against Pernod's Chinese cognac strength. Pre-pandemic dynamics with shifting Chinese economy. Pricing and destocking update.
Searched for Diageo 2025 consensus estimates
ChatGPT
I’m digging into a document titled "Diageo consensus – January 2025". It might be a PDF of analyst expectations, so I’m planning to open it to confirm.
I’m piecing together the P/E ratio for Diageo and comparing it to peers like Brown-Forman and Remy. It’s interesting to see how the current valuation stacks up against historical averages and other companies.
Hmm, let me think. Diageo stock's target cut and favorable mix. Exploration involves data like P/E 16.7 and EV/EBITDA 12.5. Fascinating!
I’m looking up Diageo's P/E and EV/EBITDA ratios on investing.com to gather current financial insights.
Searched for Diageo P/E ratio and EV/EBITDA
ChatGPT
I’m noting that the company's P/E ratio is 16.7 and EV/EBITDA is 12.5, aligning with market expectations. Searching for "P/E 16.7 EV/EBITDA 12.5 93CH Diageo" might yield more information.
Searched for Diageo EV/EBITDA
ChatGPT
I'm working through a static page with average figures for Diageo PLC's EV/EBITDA. Progress will be made as I analyze this information further.
OK, so the internet's off-limits. Python requests might bypass this, but it seems unlikely since fetching online is also blocked.
Searched for Pernod Ricard 2025 forward P/E consensus
ChatGPT
Comparing Diageo's 17x forward P/E to Pernod's 14.5x, Diageo appears more expensive. Pernod's recent share drops might be influencing this valuation, possibly due to more emerging market exposure.
Searched for Diageo H1 FY25 results organic growth
ChatGPT
Diageo's organic net sales growth of 2.5% excluding LAC suggests a potential setback for LAC. This might indicate a temporary headwind for the company.
OK, let's look at Pernod's P/E and EV/Sales ratios, noting the high dividend yield. Analysts' positive sentiment suggests a favorable outlook for Diageo.
Diageo shows a strong upside potential, outperforming consensus. Analysts expect medium-term growth, with volatile tequila tariffs.
I’m analyzing Diageo and Pernod's volatility, especially with tequila tariffs and global macroeconomic shifts. Considering base, upside, and downside scenarios to predict potential impacts.
I'm piecing together Diageo's EPS forecasts for 2024-2028, noting potential one-off gains and structural profitability changes. Comparative analysis with Pernod Ricard is also provided.
Searched for Pernod Ricard 2025 valuation
ChatGPT
I'm gathering info on Pernod Ricard's updated financial forecast for 2024-25, considering the implications for their market strategy. This aims to ensure a comprehensive and insightful analysis.
Pernod Ricard's FY24-25 suggests organic sales decline with flat margins. FY25-26 may face tariff risks, leading to a transitional year. From FY27, sales growth could rebound to 3-6%.
Searched for Brown-Forman 2025 forward P/E
ChatGPT
Brown-Forman and Diageo, with forward P/E ratios around 17x, are priced notably higher than Pernod at 14x. Remy, likely lower around 14x or less, faces a significant earnings drop.
Searched for Remy Cointreau 2025 forward P/E
ChatGPT
I'm comparing Remy and its peers' P/E ratios to past norms, noting mid-teens to high-teens valuations. Reviewing the EV/EBITDA ratios for an accurate industry comparison.
Searched for Diageo EV/EBITDA market expectations
ChatGPT
I’m confirming the authenticity of the investing.com snippet for citation, suggesting we verify it by checking a cached version if necessary.
Searched for Diageo 2025 P/E and EV/EBITDA
ChatGPT
It focuses on the snippet showing the text, though direct opening is restricted.
I’m noting the trailing P/E ratio at 17.11, forward P/E at 16.58, EV/EBITDA at 13.54 (trailing), and price to sales ratio around 3.0, highlighting a 26.46% stock decline.
I’m weighing the growth potential of Diageo and Pernod Ricard amid macroeconomic challenges and market trends, while considering consensus perspectives and valuation dynamics.
I'm highlighting Diageo's resilience, diverse portfolio, and potential for tequila growth. Meanwhile, I'm cautious about Pernod's reliance on Martell and its vulnerability to market fluctuations.
I'm comparing Diageo and Pernod Ricard's performance, valuation, and potential risks, including tariffs and market conditions, to provide a comprehensive analysis of both companies.
Debra Crew, leading Diageo, mentions recent US tariffs affecting Mexican imports, particularly tequila. The US implementing these tariffs, despite prior suspensions, poses significant new challenges.
I'm noting Diageo's CEO's acknowledgment of US tariffs and their potential impact, particularly on tequila. Highlighting the risks from geopolitical uncertainties and currency fluctuations to provide a comprehensive picture of the challenges.
I'm digging into the risks and scenarios for Pernod, emphasizing recession, tariffs, and competitive shifts. Considering the base, upside, and downside scenarios to paint a holistic picture.
Sellside typically refers to investment banking and research firms that provide execution and advisory services (research reports, investment recommendations, and financial analyses) to institutional investors. Buyside typically refers to institutional investors (Hedge funds, mutual funds, etc.) who invest large amounts of capital.
Consensus: “The consensus” is the average view of the sell-side for a specific financial measure. Typically, it refers to revenue or earnings per share (EPS), but it can be any financial measure. It is used as a benchmark for what is currently factored into the share price and for assessing if new results or news are better or worse than expected. However, it is important to know that sometimes there’s an unstated buyside consensus that would be the better benchmark for expectations.
Corporate Access: Exclusive opportunities for buy-side investors to meet with company executives, often arranged by sell-side analysts to add value beyond written research.
RAG (Retrieval-Augmented Generation): An AI technique that combines real-time information retrieval with language generation, improving accuracy in complex reasoning tasks.
EV/EBITDA: Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple, which is enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), looks at a company the way a potential acquirer would by considering the company's debt. It’s often preferred over P/E for comparing firms with different capital structures. https://www.investopedia.com/terms/e/ev-ebitda.asp
P/E (Price-to-Earnings ratio): A valuation measure that is calculated by dividing a company's share price by earnings per share. This reflects the company’s equity value in terms of $1 of earnings. More details here: https://www.investopedia.com/terms/p/price-earningsratio.asp.
Initiation Report: A first-time coverage report where an analyst formally begins analyzing a company, typically including a deep dive into business fundamentals, industry trends, and valuation.
Agentic AI Frameworks: A type of AI system that autonomously makes decisions and executes tasks with minimal human intervention, often used in data-driven workflows to enhance efficiency and automation. An example could be a large language model chat model used as an interface that calls other AI models depending on the prompt and, in turn, leverages other specific AI agents that handle specific tasks to enable the outcome.
