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.
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.
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.