Nov 9, 1999 at 12:00AM
First, if you haven't read Brian's excellent Brown-Forman overview, click here -- we'll wait for ya.
A few facts in Brian's overview probably stabbed you in the eye. Brown-Forman is a well-run operation that achieves better-than-average returns on investment and gross margins, and that has grown its sales and earnings per share (EPS) at modest but respectable rates the past 10 years. Since the end of the last decade, sales grew 5% annually, and EPS grew 10% annually. The company's sales growth fails our "double-digit" goal, but Brown-Forman has enough going for it that we'll initially compromise and push on.
Driving this efficient, cash-spewing business are the brand-leading products in the company's beverage unit, a unit that accounts for 70% of total sales. Brown-Forman generates free cash flow to spare; the only concern is how to reinvest the cash at a handsome rate of return. Aside from expanding the product line, management has effectively reinvested in making operations more efficient, thereby boosting gross and operating margins handsomely the past decade.
Despite all of these positives, however, only one thing struck me as having a lasting and immediate impact on my analysis. That one thing is the company's main product: alcohol.
Alcohol. Brown-Forman sells:
Jack Daniel's Tennessee Whiskey
Canadian Mist Canadian Whisky
Early Times Kentucky Whisky
Old Forester Kentucky Straight Bourbon Whisky
Bushmills Irish Whiskey
Glenmorangie Single Highland Malt Scotch Whiskies
Fetzer Vineyards California Wines
Korbel California Champagnes and Wines
Bolla Italian Wines
If only the company sold gin, too, I might be more interested in it. Seriously, though, I am not interested in investing in a company that primarily sells alcohol. I enjoy an occasional drink almost as much as Brian does, but I can't think of any redeeming reasons why I should send money to a company involved in the manufacture of alcohol and subject myself to the risks involved.
Brian mentioned that Brown-Forman is at the whim of governmental regulation. While it is extremely doubtful that Prohibition will ever rise again, stranger things have happened. Besides, I actually wouldn't mind its return on the condition that Prohibition's resurgence somehow reinstated certain other unrelated historical circumstances from the 1920s, such as an exchange rate of 25 French francs to the U.S. dollar and the ability to rent an apartment in Paris for $30 a month. Anyway, more likely than Prohibition is an increase in alcohol taxes. In fact, I believe taxes on alcohol should rise until drunken driving deaths are as infrequent as airplane disasters. Europe doesn't have the DWI problem that the U.S. does.
The risks of investing are more than governmental, however; they are personal. I don't invest only "to make money." I invest to round out my life, and that means investing in companies offering missions and products that I believe in -- companies that help society more than harm it. In this light, it almost seems silly to send money to Johnson & Johnson (NYSE: JNJ) with one hand, and to send money to an alcohol company with the other hand -- unless you're a little wicked.
In a nutshell, I'm not interested in adding more money to the coffers of an alcohol giant. I reached my decision without needing to analyze company numbers, because numbers (i.e., dollars) cannot convert someone's moral belief, and if they can, that's when you've got problems. (So many movies have been based on this scenario. A Simple Plan jumps to mind.)
Of course, I'm not pushing my morals on anyone else (that would be a disaster). I'm simply not interested in this candidate. If you are, you should continue to pursue the investment. Anything less would be unFoolish. Brian provided an overview of the company and a Brown-Forman message board does exist on the Fool. Meanwhile, to discuss this column and the company for the next few days, please visit the Drip Companies message board. I invite disagreement! That's Foolish!
Tomorrow, I will explicitly and intentionally condemn the business of Philip Morris (NYSE: MO) and especially the practice of its management, and that should conclude the first round of our food and beverage study!
- Nov 9, 1999 at 12:00AM