Diageo still top spirits pick, but the drinks market will be unsettled at best

Diageo PLC (LSE:DGE) remains the preferred name in the spirits sector, according to UBS, as the European beverages group braces for a mixed first quarter marked by foreign exchange pressure, patchy consumer demand, and lingering trade uncertainty.

In a preview note ahead of results season, the bank says it continues to favour the Smirnoff and Johnnie Walker maker over its rivals despite a challenging backdrop.

It highlighted the group's resilience and potential benefits from easing supply constraints around Crown Royal in the US and a transactional forex tailwind from the weaker Mexican peso.

But while Diageo tops the list within spirits, the broader message from UBS is one of caution.

Earnings revisions across the sector are likely, driven in part by recent euro strength and weakness in key markets like the US and China.

For spirits makers, this is compounded by high exposure to the US consumer, a segment that showed further signs of strain in February and March.

UBS’s sell-out tracker points to a 1.4% year-on-year drop in US spirits industry value sales, excluding ready-to-drink products, with volumes down 1.6%.

That compares with flat to modest growth in the previous quarter. For Diageo, which has the highest operating profit exposure to the US among its peers, that spells risk, particularly if the dollar remains soft.

The threat of tariffs, although currently dialled back, still hangs in the background.

UBS estimates a 10% US tariff on European and UK spirits would cut Diageo’s earnings before interest and tax by around 2%. If duties rise to 20% on EU imports and 10% on UK imports, the hit could be closer to 4%.

Elsewhere in the sector, Pernod Ricard faces pressure from weakness in Asia travel retail and a softer European market, with UBS estimating more than one percentage point of downside risk to third-quarter organic sales.

Remy Cointreau’s US depletion trends are improving, but UBS says this is mostly due to easier comparatives rather than genuine volume recovery. The bank expects Remy to clarify its US tariff exposure - a disclosure that could trigger fresh downgrades.

Campari is faring somewhat better, with UBS in line with market expectations of a 1% decline in first-quarter organic sales. A softer US performance is expected to be partially offset by stronger results in Asia.

In contrast, brewers and bottlers are holding up more robustly. UBS sees limited direct impact from tariffs in these categories, and greater reliance on the European consumer, who appears to be in slightly better shape than their US counterpart.

The bank also notes that brewers benefit from a weaker dollar, which reduces input costs.

Anheuser-Busch InBev is flagged as the top beer pick, with low-quality upside risk to margins and net finance costs in the first quarter.

Heineken could benefit from double-digit volume growth in Vietnam and solid gains in Brazil, according to Nielsen data for January and February. If tough pricing talks in Europe are resolved, a volume recovery in the second quarter could follow.

Carlsberg, which generates a quarter of its earnings in China, may also benefit from an easier comparison base and signs of renewed stimulus in the country.

Among soft drinks players, Coca Cola HBC AG (LSE:CCH) is expected to beat revenue expectations thanks to favourable pricing and mix in emerging markets.

UBS says volumes excluding Russia are showing signs of growth. Coca-Cola Europacific Partners may face some near-term volume pressure, but is supported by moderating input costs and a possible rebound in out-of-home sales in Europe.

While UBS continues to favour Diageo in spirits, Anheuser-Busch InBev in beer, and Coca-Cola HBC in soft drinks, the tone ahead of Q1 is cautious. Currency moves, US softness and any signs of rising anti-American consumer sentiment are all under scrutiny - and could shape the narrative well beyond this earnings season.