Carlsberg's lack of an economic moat was evident in its second-quarter results, which missed our expectations on a few metrics. Given continued volatility in Eastern Europe, we were not at all surprised that management lowered its full-year guidance, but the performance in Western Europe was a disappointment. We will lower our full-year expectations; this may have a negative impact on our DKK 600 fair value estimate, though we doubt it will be material, as our cash flow forecasts will continue to assume stabilisation in Eastern Europe in 2016-17. The reaction to the earnings report notwithstanding, Carlsberg trades at a slight discount to our valuation and at a significant discount to its peers on a P/E basis. However, we believe that instability in its core markets and the lack of sustainable competitive advantages present greater risks to Carlsberg's cash flows than to its large-cap competitors.
Revenue grew 1% on a reported basis, missing our 2% internal forecast, and was flat on an organic basis. The underperformance was primarily caused by soft volumes in both Eastern and Western Europe, although the Asia segment performed in line with our forecasts. Western Europe was the primary disappointment, and although we had expected volumes to slow sequentially due to technical issues, we believe Carlsberg reversed its first-quarter share gains in some large markets such as the UK and Germany. The short-term puts and takes in share indicate a competitive market, and we think Carlsberg's cost disadvantage to its larger peers could limit its ability to maintain share in the long term.
Eastern Europe experienced continued weakness, driven by a 19% drop in volumes. While this is a staggering decline, the good news is that the Russian market did not deteriorate further, with sales to consumers declining 9%. Although Carlsberg's price/mix was positive to the tune of 32%, this was boosted by the double-digit inflation contributing to the free-falling volume declines.
As we stated in our first-quarter earnings note, we believe the catalyst for upside to Carlsberg's stock will be the performance of the business in Eastern Europe. On the evidence of this quarter, however, the Russian market is still very weak. In light of the strong rebound in the stock earlier this year, Carlsberg is trading close to our fair value estimate. Given the heightened risks to cash flows that we have discussed, and that played out in the second quarter, we recommend that investors wait for a greater margin of safety before building a position in the brewer.
