Last month I profiled Brown-Forman Company (NYSE: BF.B) as part of my current research on companies with high brand power. Recently the Rule Maker looked at another branded powerhouse, Tiffany & Co. (NYSE: TIF), and of course several of our current holdings, particularly Nokia (NYSE: NOK), Coke (NYSE: KO), and American Express (NYSE: AXP) are among the most powerful brands in the world. More powerful, even, than Webster.

The name Brown-Forman may not ring a bell to most people, but its product list certainly will. Brown-Forman's bullpen includes Jack Daniel's, Finlandia, Southern Comfort, Glenmorangie, Lenox, Gorham, Fetzer wines, and Dansk, among others. These are top-notch brands supported by strong products in a diverse set of markets, some of which have little correlation with overall economic condition.

Should the RM invest in Hooch?
As a follow-up I thought I'd run Brown-Forman through the Rule Maker criteria for kicks. Before I do let's discuss an important concept in investing: that of social responsibility. For moral reasons there are many investors who will not consider so-called "sin stocks," including those that market things such as tobacco, alcohol, pornography, or gambling. The theory here is that your money is being used to support such activities.

I personally have no such moral conflict. These companies provide services for which people are willing to pay. These services are legal, and tend to be both highly regulated and highly taxed. They also happen to be extremely profitable. Still, it is not a pretty world where the motive for profit comes at the absolute expense of everything else. I believe that people should invest in companies that interest them, ones they can understand. If a Brown-Forman or a Philip Morris (NYSE: MO) does not represent your values, and this is something that is important to you, then there are thousands of other, perhaps better, places to put your money.

Gentleman Jack and the RM Criteria
1. At least one Sustainable Competitive Advantage
Brown-Forman considers itself to be a "brands company," and those brands provide its products with both their differentiation and their competitive advantage. In wine and spirits branding issues are of supreme importance, as they allow companies to charge vastly different prices for essentially the same product. In the last year, Brown-Forman was able to increase its prices on several of its major wine and spirits brands, and still managed to increase unit sales for all but its Korbel Champagne, which suffered due to comparisons to the Millennium year, when one or two extra bottles of bubbly were sold.

To this end, Brown-Forman's investment in its brands is enormous. In 2001, its wine and spirits division spent nearly 14% of total revenues on sales and marketing. In addition, by carrying brands from several different categories of spirits and wines, Brown-Forman maintains significant power among its distributors in regard to price points and shelf space. These types of advantages in a branding business should not be underestimated.

2. Great Management
Brown-Forman has remained in the control of the Brown family since its founding by George Brown in 1870, who, according to the Brown-Forman website, came up with the idea of selling premium whiskey in sealed glass bottles. The current CEO, Owsley Brown II, is another in a line of Brown family members who have run the company, though the management team has significant representation from outside the family as well.

As a representative peek into Brown-Forman's management, I'd point to the performance of Finlandia Vodka, which was in danger of being swamped by its competitors when the company took over marketing responsibility in 1996. In each of the subsequent years, Finlandia sales by volume have increased by more than 20%. Tellingly, most of the senior management staff of Brown-Forman has been with the company for the majority of their careers. These are all very positive factors for a company with a history of growth and above-average shareholder returns.

3. Expanding Possibilities
Well, we could hope for the Saudi Arabias of the world to open up to alcoholic beverages, but absent that the expanding possibilities for Brown-Forman's wine and spirits businesses are not so clear-cut. What is clear is that more than 80% of Brown-Forman's total sales are based in the United States, $1.8 billion as compared to $370 million in fiscal 2000. This means that there are many markets that remain relatively unpenetrated by Brown-Forman products.

However, just as brand loyalty works for Brown-Forman in its home markets, it works against them as they seek to break into some other companies' home turf. Do not expect the Germans to abandon en masse their Hacker-Pschorr for a Jack Daniel's anytime soon. Still, the markets do exist for expansion. Brown-Forman has begun to aggressively market its durables, including Lenox and Gorham, through catalogues, the Internet, and direct channels, which has led to double-digit sales increases for these labels.

On the qualitative side, I have given Brown-Forman some high marks, with a bit of a question surrounding the important "expanding possibilities" measure. Having passed the company in these considerations, I'd like to investigate further. In the next installment we'll look at the meat of Brown-Forman's past and current performance, as measured by its financial returns. In the interim, The Rule Maker managers invite you to post your thoughts on Brown-Forman as an investment possibility on the Rule Breaker Strategies discussion board.

Do you believe that a company that derives the majority of its revenues from alcoholic beverages should be considered for investment by the Rule Maker Portfolio, regardless of financial performance? If not, what actions by the company would you want to see to increase your comfort level, such as active involvement in alcoholism prevention and treatment programs, teen education programs, and the like?

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In unrelated news, we're almost one-third of the way through our analysis of the companies in the Rule Maker Portfolio. So far, we've reviewed Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), and Nokia (NYSE: NOK). Here's a summary of what we've learned and where we stand with each investment.

We believe Intel will continue to dominate the microprocessor industry, and that the industry will continue providing healthy cash flow for expansion. While Intel's new focus, which involves expanding into communications products, remains cloudy, management has the experience and financial resources to attack new markets. That said, the company represents 15% of our portfolio. If investor enthusiasm boosts the stock price beyond levels we think are sustainable, we'll look to take a profit by paring back our holdings.

Rule Maker manager Mike Trigg summed it up well in his July 19 article: "The ultimate success of the company's new efforts won't be known for some time, and we realize the road could be rocky early on. Microsoft rarely enters a new market and passes with flying colors on the first try. In fact, there were several failed versions of Windows until 1990 when version 3.0 reached mass success. The same will most likely be true for at least some of Microsoft's newest endeavors. However, that could create more favorable buying opportunities. At the moment, we like where the stock stands in our portfolio (second-largest holding) and look forward to remaining happy Microsoft shareholders for at least another five years."

Here's Todd Lebor's conclusion from his July 25 article: "A company with Nokia's mind share, brand power, balance sheet, and competitively superior operating efficiencies deserves a premium to the S&P 500. As the crash-and-burn flames are extinguished throughout the telecom industry, we expect Nokia to show some first-degree burns that will heal quickly. That's nothing compared to the third-degree burns covering its competitors that are much harder to recover from." We're comfortable holding Nokia, which we expect to continue dominating a fast-growing industry (2001 excluded).

Bill Mann refuses to do business with any company that incorporates horns or sirens in its radio ads. C'mon, that's just rude! At time of publishing, Bill owned shares of Tiffany and Coke. The Motley Fool is investors writing for investors.