Chapter 2

Damage Arithmetic

Pernod Ricard's operating earnings have barely moved off their peak, yet the equity has lost roughly seven-tenths of its value. Profit from recurring operations fell about 12% from the FY2023 high and EBITDA about 10%, while enterprise value fell about 57% and the market capitalisation about 70%. Almost the entire enterprise-value decline is multiple compression, not lost earnings — and financial leverage turns that into a still larger equity move. The gap between price damage and business damage is wide; whether it is an opportunity depends entirely on whether the earnings shortfall is temporary.

The earnings hit against the price hit

The starting point is to put the two declines side by side on the same clock — from the FY2023 peak to today — measured in the company's own reported figures.

At the operating line, the damage is modest. Profit from recurring operations (PRO), the group's headline profit measure, peaked at €3,348m in FY2023 and was €2,951m in FY2025 [1][2] — a decline of 11.9%. Operating margin held at 26.9% of net sales [3]. The damage grows as you move down the income statement: statutory group net profit fell from €2,262m in FY2023 to €1,626m in FY2025, down 28% [4], as higher interest expense, a higher tax charge, and a FY2024 impairment absorbed more of a smaller operating base. On the recurring earnings-per-share line that consensus follows, the fall is larger still: €9.11 in FY2023, €7.90 in FY2024, €7.26 in FY2025 [5][6], and consensus for FY2026 sits near €5.77 — about 37% below the peak.

Against that, the price. The shares peaked at €218.00 during FY2023 and last traded at €63.88, a drawdown of roughly 71% (Dislocation and Screen sets the trigger stack behind it). Market capitalisation at the June-2023 year-end was €51,740m; at €126.70 a year later it was €32,097m; today it is about €16.1bn [7][8].

Source: PRO, EBITDA and net profit from FY2023 and FY2025 URDs [9][10]; EPS and market values from stock-market-data tables [11][12]; FY2026 EPS is consensus, as reported.

The spread across these bars is the whole point. Take the operating measure and the price move together, and the equity fell roughly six times as far as PRO. Take the harshest earnings measure — recurring EPS out to the FY2026 consensus trough — and the equity fell about twice as far. The truth sits between: the operating engine is lightly dented, but leverage, tax, and FX magnify a small top-line problem into a real net-profit decline, and the share price then moves several times that.

Where the enterprise value went

Because the equity is what is left after the debt, the cleaner way to see the damage is at the enterprise-value level, then decompose it into the two things that can move it — how much the business earns, and the multiple the market pays for those earnings.

Source: equity from stock-market-data (market cap) [13]; net debt of €10,273m (FY23) [14] and €10,727m (FY25) from the net-debt reconciliation [15]; EBITDA is PRO plus depreciation; current equity derived from €63.88 on ~252m shares.

Enterprise value fell from about €62.0bn to about €26.8bn — a 57% decline. EBITDA over the same window fell about 10%. The rest is the multiple: EV/EBITDA compressed from roughly 16.5x to about 8.0x. Decomposed, the 57% enterprise-value decline is roughly one-eighth lost earnings and seven-eighths a lower multiple. The market has not written down what Pernod earns; it has re-rated the business from a premium-staples multiple to one it assigns to a shrinking franchise.

Leverage then does the last step. Net debt sat near €10.3–10.7bn at both points and barely moved [16]. With the debt fixed, the entire €35bn of enterprise-value loss fell on the equity — which is why a 57% EV decline became a 70% equity decline. At 3.3x net debt to EBITDA [17], that amplification is a permanent feature of the equity, not a temporary one: it will also amplify any EV recovery on the way back up.

Source: derived from reported PRO, EBITDA, net debt and market values, FY2023–FY2025 URDs [18][19].

What the current price implies

A second lens asks what growth the current price already bakes in. Treat the equity as a perpetuity of free cash flow: at €63.88 the market values the equity at about €16.1bn, against FY2025 free cash flow of €1,133m as reported and €1,348m on the group's recurring measure [20]. Solving a simple Gordon-growth relationship for the perpetual growth rate the price implies, across a range of discount rates, gives the following.

Source: derived from €16.1bn market cap and FY2025 free cash flow of €1,133m / €1,348m [21]; Gordon-growth solution, assumptions stated.

The answer clusters near zero: at an 8–9% cost of equity, the price implies perpetual free-cash-flow growth of roughly minus 0.3% to plus 1.8%, depending on which cash-flow figure is used. For a business whose profit from recurring operations compounded from €2,581m in FY2019 to €3,348m in FY2023 — about 6.7% a year [22] — the price is set for something close to a permanent stall. That is a statement about the future, not the past: the reverse-DCF does not say the market is wrong, only that it has stopped paying for growth.

Source: FY2019–FY2023 from the FY2023 URD indicators [23]; FY2024–FY2025 from the FY2025 URD income statement [24].

Bounding the intrinsic damage

The final step is to price the disclosed problem directly. Suppose the shock is exactly what management describes — a stretch of depressed earnings that eventually recovers to the prior run-rate. How much present value does that actually destroy?

Take the operating shortfall against the FY2023 peak: PRO ran €232m below peak in FY2024 and €397m below in FY2025. Extend that a conservative path — a wider €500m gap in FY2026, then €350m and €150m in FY2027–FY2028, before full recovery to the peak run-rate. The cumulative shortfall is about €1.6bn of pre-tax PRO, roughly €1.2bn after tax, and about €1.0–1.1bn in present value at an 8% discount. Double both the depth and the duration — a €500m annual net shortfall sustained for six years — and the present value is still under €3bn.

Source: derived from the PRO shortfall against the FY2023 peak [25][26]; discounted at 8%, assumptions stated; enterprise value removed from the EV decomposition above.

The comparison is stark. A temporary problem, taken to a pessimistic-but-honest extreme, explains on the order of €1–3bn of present value. The market removed about €35bn of enterprise value and roughly €36–40bn of equity value. For the price to be right, the loss cannot be a passing shortfall in earnings; the multiple re-rating has to be permanent — the business must be worth 8x EBITDA rather than 16x forever, which is the same as saying the recurring cash flows never grow again. That is the assumption the whole gap rests on, and it is the temporary-versus-permanent demand question the rest of the report has to settle.

What narrows the gap

Three facts cut against reading the whole gap as free money.

First, the net-line damage is not the small hit the classic dislocation frame assumes. Recurring EPS is down about 37% from the peak to the FY2026 consensus trough, and estimates are still being cut — the FY2026 consensus of about €5.77 is roughly 21% below FY2025 [27]. The operating trough may not yet be in the reported numbers, and if the demand problem proves structural, today's earnings still overstate the eventual run-rate.

Second, the cash return sits below the level that would make the gap self-evidently cheap. FY2025 free cash flow was €1,133m reported and €1,348m recurring, against a €16.1bn market cap — a free-cash-flow yield of 7.0% to 8.4% [28], short of the roughly 10% mark this reader's framework treats as the reference line. The 3.3x leverage that amplifies the equity on the way up also raises the stakes if the recovery is slow.

Third, and on the other side, the most recent trading points toward stabilisation rather than deterioration. In the third quarter of FY2026 organic net sales were roughly flat at +0.1%, total group volumes returned to growth at +4%, and outside the still-contracting US and China markets the rest of the world grew about +5%; the steep 14.8% reported decline over nine months is mostly currency (a €515m foreign-exchange drag) and the disposal of the Wines and Imperial Blue businesses (€393m), not organic collapse [29]. That reported-versus-organic split matters: it means the headline top-line damage overstates the deterioration in the underlying business, which is consistent with an operating engine that is bruised rather than broken.

The arithmetic, then, is two-sided but clear on where it points. The price has fallen far more than the business has, and most of that is a lower multiple that would reverse if growth returns. What it cannot tell you is whether growth returns — and that read would change if the demand data showed Western spirits consumption declining structurally rather than cyclically, in which case a permanently lower multiple is the correct answer rather than the market's error.