How Brown-Forman Will Build on the Success of 2014

Brown-Forman posted impressive numbers in 2014, and this should continue for many years to come.

Jun 18, 2014 at 8:37AM

On June 4, Brown-Forman (NYSE:BF-B) investors got to take a look into the results of the company's operations for fiscal 2014, and they have plenty to be excited about.

Some of the highlights for 2014 include:

  • Reported sales growth of 4%, 6% underlying (ignoring currency effects and non-recurring items)
  • Reported operating income growth of 8%, 11% underlying
  • Earnings and earnings-per-share growth of 11%
  • Increased regular cash dividend by 11%

Now we can dig into the report and see how and why the company reported such strong numbers and how it can continue to do so even with stiff competition from Diageo (NYSE:DEO) and Constellation Brands (NYSE:STZ).

The sales growth
Brown-Forman grew sales by 4%, which is right in line with the previous 10-year compounded annual growth rate of 4%. This sales charge was led by its American whiskey category, which mainly consists of the Jack Daniel's brands. Underlying net sales for the Jack Daniel's brands grew by 8% in fiscal 2014.

A quick peek into the future suggests that the company can keep up this pace. It has new product lines which are growing very quickly such as Jack Daniel's Tennessee Honey and it is also growing sales at an exceptional pace in certain international markets.

A large reason I believe Brown-Forman will continue its growth is its international presence. The company's top three countries by sales, the United States, Australia, and the United Kingdom, made up 63% of sales in 2014, and the top ten represented 84% of sales. Its underlying sales growth in the top three countries was only 2.7%.

With 84% of the company's sales coming from only ten countries, this leaves just 16% to the rest of the world. Investors should love to hear this, as 16% of the company's underlying sales grew by 15% and plenty of room remains for more. 

The earnings growth
Brown-Forman's earnings growth has been helped along by widened margins over the last several years. Net profit margin this year stood at 15.6%, as it has grown steadily over the last ten years from 10% in 2004.

Brown-Forman's excellent position as one of the largest companies in a business-friendly competitive environment has helped margins grow and will continue to do so in the future.

Brown-Forman enjoys a lack of pricing pressure from suppliers, as the biggest inputs for whiskey are corn and water, which are commodities. It also doesn't face pricing pressure from buyers because its products are known for excellence and consumers are loyal to its brands. Most customers are willing to pay the extra few dollars to get their favorite middle-shelf whiskey over bottom-shelf competitors.

There are threats of substitutes such as consumers switching to wine or beer, but as said earlier, most consumers are fairly loyal to their favorite drinks and brands. Lastly, barriers of entry are high for new competitors due to the large investment required to create a large-scale distillery and the laws and regulations involved.

The dividend
Brown-Forman once again raised its dividend payout, as it has for 30 years running, to $1.09 per share. The cash dividend rose 11% over the cash dividend in 2013, excluding the special dividend issued that year. This is now the 68th consecutive year in which the company has paid a dividend, and the yield currently stands at 1.6%.

I believe the company is committed to paying plenty of cash to its shareholders and has the financial means to continue to do so in the future. In 2014, the company's free cash flow to equity covered the dividend 2.25 times. The dividend coverage by free cash flow to equity is below the five-year average of 4.7, but investors shouldn't be alarmed as this is mainly due to the company paying off debt this year. 

Sizing up the competition
Two of Brown-Forman's largest competitors are the spirits giant Diageo as well as a smaller, more diversified Constellation Brands.

Diageo has outpaced Brown-Forman in sales growth over the last ten years but has fallen short in earnings growth, only growing earnings by 6% per year compared to Brown-Forman's 8% growth per year.  

For Constellation Brands, which is more diversified into other alcoholic beverages such as beer and wine, growth is another story. The company's revenues and earnings have been very volatile over the last ten years, but largely unchanged other than this last year which had debt-fueled growth by acquisition.

I believe Brown-Forman will outpace these two competitors due to the surging popularity of American whiskey worldwide, as well as the company's continued efforts in emerging markets.

Diageo, who competes with Brown-Forman primarily with their Scotch whisky, already relies on 42% of their sales from emerging markets and these regions only grew sales at 11% in 2013, growth which was partially fueled by acquisitions.  Constellation Brands competes with Brown-Forman on a basis of substitute products as they sell primarily beer and wine, but the company has barely touched emerging markets yet. Constellation derives 89% of its sales from the United States and 11% from Canada, New Zealand, and Italy.

I believe the growth already shown by Brown-Forman and expected growth justifies its shares trading at 25 times forward earnings compared to both Diageo and Constellation trading at around 18 times forward earnings.

A Fool's take
Brown-Forman put up very strong numbers in 2014, and in its report the company proudly stated that its compounded annual total shareholder return (assuming dividend reinvestment) has been 17% over the last ten years, more than double that of the S&P 500.

I believe the company could easily continue this trend as it is in a favorable competitive environment and it continues to expand its products into emerging markets. 

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.

Jacob Meredith and Appalachian Capital Group, LLC have no positions in any stocks mentioned. The Motley Fool recommends Diageo (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers