Investing.com -- UBS Global Research in a note dated Wednesday has downgraded Davide Campari-Milano NV (BIT: CPRI ) to a "neutral" rating from its previous "buy" recommendation, citing a weakening sales environment, particularly in the critical US market, and growing tariff-related pressures.

The downgrade reflects concerns over slowing topline growth, challenges in the tequila segment, and competitive pricing dynamics in key categories.

Campari (LON: 0ROY ), best known for its portfolio of spirits including Espolon Tequila, Wild Turkey Bourbon, and Grand Marnier, has seen its US market performance deteriorate.

As per proprietary data from UBS, Campari’s US sell-out declined by 2% in December and January, underperforming the overall industry trend, which remained flat.

While its on-premise performance in Q4 was relatively strong, showing a 7% increase, broader sales trends signal weakness.

Espolon Tequila, which accounts for roughly 30% of Campari’s US net sales, has been particularly affected by a slowdown in the Blanco segment and increasing competition from lower-priced brands.

Further compounding Campari’s challenges are tariff risks. The company has estimated a gross impact of €35 million in FY2025 from a newly imposed 25% US tariff on Mexican imports, which could rise to €50 million annually.

While UBS anticipates Campari will mitigate around half of this impact through pricing and cost measures, the tariffs still represent a significant drag on earnings.

Additionally, there is the looming threat of potential European tariffs, which, if implemented, could further strain profitability by an estimated €50 million.

UBS has adjusted its financial forecasts downward, cutting Campari’s FY2025 and FY2026 earnings per share projections by 9% and 12%, respectively.

These reductions reflect weaker topline trends, tariff pressures, foreign exchange headwinds, and a slightly higher tax rate.

Consequently, the brokerage has also lowered Campari’s 12-month price target to €6.30 from €8.50.

This revised valuation aligns Campari’s multiple with the broader European Staples sector, marking a shift from the previous 40% premium it commanded.

The tequila segment remains a critical area of concern. While competitor Diageo (LON: DGE ) has continued to expand its presence with strong growth in Don Julio Reposado, Campari’s Espolon has struggled amid category-wide softness.

At the same time, Wild Turkey is facing pricing pressure in the bourbon market, and brands like Skyy Vodka and Grand Marnier are proving to be drags on Campari’s overall performance.

Despite these near-term headwinds, UBS acknowledges Campari’s longer-term potential. The company’s transition to a "House of Brands" model, with a sharper focus on key category and country investments, could provide a stronger foundation for future growth.

Furthermore, disciplined cost and margin management could help Campari emerge from the current industry downturn in a more competitive position.

However, until there is clearer visibility on topline improvement and a resolution to the tariff uncertainties, UBS does not foresee the stock returning to its previous valuation premium.

Campari’s valuation metrics reflect this cautious outlook. The company is currently trading at 19 times its estimated 2025 earnings and 21 times EV/NOPAT, a 5% premium over its European Staples peers.

This represents a notable contraction from prior valuations and signals investor concerns over Campari’s ability to navigate ongoing industry challenges.

In the broader context, Campari’s downgrade comes at a time of increased uncertainty in the global spirits market.

Consumer behavior shifts, economic pressures, and regulatory challenges have all contributed to a more challenging operating environment.

While Campari has historically demonstrated resilience, the combination of softening demand, tariff-related costs, and intensifying competition has led UBS to take a more measured stance on the stock’s prospects.

As a result, investors looking at Campari will need to weigh its longer-term strategic potential against the near-term pressures that have prompted this downgrade.