Brown-Forman Stays Neutral - Analyst BlogWednesday, April 18, 2012
We reiterate our long-term Neutral recommendation on Brown-Forman Corporation - B (BF.B), based on the company’s expectation of considerable improvement in consumer trends in the fourth quarter of fiscal 2012.
Battered by higher input and fuel costs along with increased operating expenses, Brown-Forman’s third-quarter 2012 earnings of 93 cents per share missed the Zacks Consensus Estimate of $1.00 and declined approximately 3.1% from the prior-period level.
However, in anticipation of a solid improvement in consumer trends during the last quarter of fiscal 2012, Brown-Forman expects a high-single digit growth in net sales and operating income. Moreover, the company expects fiscal 2012 earnings in the range of $3.50 to $3.65 per share.
Brown-Forman is one of the leading producers and distributors of premium alcoholic beverages in the world. The company commands a strong portfolio of globally recognized brands, such as Jack Daniel’s, Finlandia, Southern Comfort and Canadian Mist. We believe this provides a competitive edge to the company and bolsters its well-established position in the market.
Moreover, Brown-Forman plans to expand Jack Daniel's market share in the developed markets, such as France and the U.S., and emerging markets including Russia, Poland and Mexico, where the whiskey category is in early stages of development. In near future, the company also intends to expand the sphere of other brands, such as Gentleman Jack, Jack Daniel's Single Barrel and Jack Daniel's ready-to-drink within Jack Daniel’s.
Further, the company has a consistent track record of returning cash to shareholders in the form of share repurchase, and dividend payment. Brown-Forman has paid quarterly cash dividends consecutively for the past 65 years while increasing the same for the last 28 years.
However,the company’s customers remain sensitive to macroeconomic factors including increase in fuel and energy costs, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.
Furthermore, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by governments of respective countries. The effect of any excise tax increase in the future may have an adverse effect on Brown-Forman’s financial performance.
Above all,the company faces intense competition from other well-established players in the industry, including Beam Inc. (BEAM), Constellation Brands Inc. (STZ) and Diageo plc (DEO). Moreover, Brown-Forman also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.
Currently, Brown-Forman has a Zacks #4 Rank, which implies a short-term Sell rating.
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