Morgan Stanley downgrades Pernod Ricard on weak FY26 earnings, high risk ahead

Morgan Stanley has downgraded Pernod Ricard to "underweight" with a revised price target of €85, citing significant valuation concerns and a heightened risk of earnings downgrades. The brokerage projects FY26 organic sales to decline 2% and earnings per share to fall 19% from FY25, both substantially below consensus, due to anticipated soft sales, ongoing tariff costs, and higher leverage. This pessimistic outlook, combined with Pernod's current valuation at 15.8x FY26 earnings and structural market pressures, underpins the downgrade and suggests further negative earnings revisions are probable.

Analysis

Morgan Stanley has downgraded Pernod Ricard (EPA:PERP) to “underweight” and reduced its price target to €85 from €90, citing significant valuation concerns and a heightened risk of earnings downgrades. The brokerage's outlook is substantially more bearish than the market consensus, forecasting a 2% decline in FY26 organic sales versus the consensus view of a 0.3% decline. This is driven by an expected weak start to the fiscal year, with Q1 sales projected to fall 6.5%. Consequently, Morgan Stanley projects FY26 earnings per share will drop 19% year-over-year to €5.85, a figure that is 9% below consensus and does not include an additional potential 2% EPS reduction from the pending disposal of Imperial Blue. While PERP's valuation of 15.8x projected FY26 earnings is slightly below staples, the brokerage deems it expensive given the company's higher leverage, weaker organic sales growth, and structural pressures in key markets. This financial strain is further evidenced by a projected free cash flow yield of 4.2% for FY26, which trails the sector average of 5.1%, supporting the thesis for a challenging outlook.

Key Decisions for Investors

• Investors should consider the significant downside risk presented by Morgan Stanley's forecasts, which are substantially below current market consensus and suggest a high probability of negative earnings revisions for Pernod Ricard.
• The stock's valuation appears stretched relative to its growth prospects, higher leverage, and lower free cash flow yield, warranting a cautious stance despite its modest discount to some sector peers.
• It is critical to monitor upcoming quarterly results, particularly Q1 FY26 organic sales, for confirmation of the negative trend, as a weak print would validate the downgrade thesis and likely trigger further downward pressure on the stock.