Brown-Forman (NYSE: BF-B ) (NYSE: BF-A ) , best known for its Jack Daniel's whiskey, continues to occupy the sweet spot of consumers' shift away from beer and toward premium alcohol and spirits. Indeed, king of beers Anheuser-Busch's (NYSE: BUD ) opening paragraph in its annual letter to its shareholders conceded that hard liquor and wine are gaining market share, to the detriment of its frosty brew. Though Brown-Forman and other spirits companies are currently the primary beneficiaries of this trend, Jack Daniel's has been growing robustly for at least the past decade, this year included.
Yesterday, Brown-Forman reported fourth-quarter and fiscal 2005 earnings for the year ended April 2006. In continuing operations, total annual sales increased 10% and earnings grew 15% for the year, extending an impressive 10-year run of double-digit top- and bottom-line growth. Jack Daniel's continues to be the driving force, with double-digit growth in gross profits and depletion growth of 8%.
According to the company, depletions represent shipments from wholesale distributors to retail customers; they're a common industry measure that serves as a proxy for consumer demand. Secondary brands such as Finlandia vodka, Fetzer wine, Southern Comfort, and pre-mixed, ready-to-drink bottled drinks also experienced strong depletion growth.
The company has been working to gain greater control over the global distribution of its brands, and subsequently to drive profitable sales growth by enhancing brand awareness. It also focuses on keeping its portfolio in tip-top shelf space. For instance, it recently acquired a "super-premium" French liqueur brand, Chambord.
This morning's conference call suggested that management appears to take a very long-term perspective on its brands. Executives discussed the company's efforts to maintain its current brands and acquire new ones. Brown-Forman attempts to develop brands over 10- or 20-year periods. Some investors might consider the company overly leisurely or slow-moving with its brands (but then again, Jack Daniel's is slow-sippin' sour mash), but this is welcome news compared to similar firms. Its rivals are seemingly focused on driving shorter-term, quarterly results, or willing to get into a bidding war to obtain currently popular alcohol brands.
Other investment positives include moderate levels of debt, with a debt-to-total capital ratio of only 20%-30% over the past year; high levels of free cash flow; and subsequent returns on capital that have ranged from 15%-20% over the past 10 years. The company isn't overly large, with a total market cap just under $10 billion, but it has a market leader in Jack Daniel's. Brown-Forman is clearly focused on continuing this growth while developing additional brands.
Brown-Forman is a great company, but the current valuation is a bit rich for my blood. Current management guidance calls for 2006 earnings of $3.10-$3.30 per share; given Brown-Forman's current share price of $75, the stock trades at a P/E between 23 and 24. I'll keep my eye on this one in hopes of a pullback into the $60's, or a flat stock price that lets earnings catch up to a more reasonable valuation, before I gain exposure to one of the better-run alcoholic beverage companies.
(It's worth noting briefly that two classes of Brown-Forman stock are traded on the New York Stock Exchange. Class A shares have voting rights, while Class B shares are non-voting. The B shares trade much more often, but both classes trade in lockstep for the most part, with an occasional increase in the A shares relative to the B shares.)
Among Brown-Forman's rivals, Fortune Brands (NYSE: FO ) and Diageo (NYSE: DEO ) are two other very well-run companies that may sport slightly more favorable valuations. Fortune Brands' stock has descended significantly from $96 to a recent $75.55, for a forward P/E under 13. In contrast, Diageo's stock has run up to a recent $66.79, but it still trades at about 13 times forward earnings. I'll do some more legwork and get back to you on those if I find anything interesting.
Here's to further Foolishness:
Diageo's dividends earned it a nod from
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Fool contributor Ryan Fuhrmann is long shares of Diageo but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss the company further.
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