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Is Brown-Forman Stock a Buy?

By Leo Sun – Oct 15, 2020 at 12:45PM

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The maker of Jack Daniel's has stayed resilient throughout the COVID-19 crisis, but is there too much growth baked into its stock price?

Brown-Forman (BF.A 0.34%) (BF.B 0.59%), one of the largest spirit and wine makers in America, has been a resilient long-term investment. Its Class A shares are thinly traded and mainly owned by the Brown family, but its non-voting Class B shares have rallied more than 80% over the past five years as the S&P 500 rose 75%.

In fact, after factoring in reinvested dividends, Brown-Forman generated a total return of nearly 100%. The stock also easily weathered the COVID-19 crisis, rising about 15% this year against the S&P 500's 8% gain. Let's see why Brown-Forman continues to outperform the market, and whether or not the stock is still worth buying.

A glass of whiskey with ice.

Image source: Getty Images.

How does Brown-Forman make money?

Brown-Forman's diverse portfolio of brands includes Jack Daniel's whiskey, BenRiach scotch, Finlandia vodka, Herradura tequila, Chambord liqueur, and Korbel wine.

It sells its products in over 170 countries, but 50% of its revenue came from the United States in fiscal 2020, which ended on April 30. No other country generated more than 5% of its total revenue last year.

Jack Daniel's is the company's largest brand, but it doesn't regularly break down its revenue by brand. Instead, it only reports each brand's year-over-year growth in sales and shipments.

How fast is Brown-Forman growing?

Brown-Forman's sales, minus excise taxes, rose 1% to $3.36 billion in 2020. Its sales decelerated significantly in the fourth quarter as the COVID-19 pandemic closed down restaurants, bars, and other businesses. Nonetheless, its underlying sales in the United States, which excludes estimated inventory shifts, rose 5% for the year. Its domestic resilience offset the broad weakness of its overseas business, which only generated higher sales in Germany, Japan, Russia, and Poland.

Its underlying whiskey sales rose 2%, thanks to the strength of Jack Daniel's and Woodford Reserve; and its tequila sales also grew 2%, led by El Jimador and Herradura. That growth was partly offset by weaker sales of wine, vodka, and other products.

Shot glasses of tequila with lime slices.

Image source: Getty Images.

Brown-Forman's gross and operating margins also contracted in 2019, due to higher tariffs in Europe, higher agave costs, and COVID-19 expenses. As a result, its net income dipped 1% to $827 million, or $1.72 per share.

In the first quarter of 2021, Brown-Forman's sales, net excise taxes, declined 2% year-over-year to $753 million. Its underlying sales rose in the United States and other developed markets, but declined across most emerging markets.

Its gross margin declined year-over-year, mainly due to lower sales of higher-margin products and high agave costs, but its operating margin expanded after it sold its Early Times, Canadian Mist, and Collingwood brands; reduced its expenses; and benefited from a favorable tax rate. As a result, its net income surged 74% to $324 million, or $0.67 per share.

Brown-Forman hasn't provided any guidance, but analysts expect its revenue and earnings to rise 1% and 12%, respectively, for the full year. Those are steady growth rates, but the stock isn't cheap at 40 times this year's earnings estimate. Its forward dividend yield of 0.9% also doesn't offer much downside protection.

Should you pay a premium for Brown-Forman?

Investors are likely paying a premium for Brown-Forman because it's remained stable throughout the pandemic, and its growth will likely accelerate after the crisis ends. However, Brown-Forman still remains richly valued relative to companies like Constellation Brands (STZ 0.30%) and Diageo (DEO 0.38%), which both sell beer, spirits, and wine.

Constellation, which is expected to generate less than 1% earnings growth this year, trades at 21 times forward earnings and pays a forward yield of 1.6%. Diageo, which is expected to post a 1% earnings decline, trades at 25 times forward earnings and pays a forward yield of 3.1%.

In short, Brown-Forman is a solid company trading at a wobbly valuation. Its P/E ratio is historically high, its dividend yield is historically low, and its near-term recovery remains uncertain due to a recent resurgence in COVID-19 infections. Therefore, I wouldn't buy this stock until it cools off to more sustainable valuations.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Brands. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.

Stocks Mentioned

Brown-Forman Stock Quote
$74.48 (0.59%) $0.43
Brown-Forman Corporation Stock Quote
Brown-Forman Corporation
$74.20 (0.34%) $0.25
Constellation Brands Stock Quote
Constellation Brands
$259.49 (0.30%) $0.77
Diageo Stock Quote
$190.98 (0.38%) $0.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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