Wine and spirits distributor Brown-Forman (NYSE:BF-B) will report third-quarter 2008 financial results this Friday, Feb. 29. Let's raise a glass to toast the distributor's anticipated performance.

What analysts say:

  • Buy, sell, or waffle? Half of the eight analysts covering Brown-Forman rate it a buy, while one says to hold. Three analysts, however, are crying in their beer, rating the Jack Daniels seller an "underperform." No one has come right out and said "sell."
  • Revenue. Perhaps that's because sales are expected to jump more than 16% in the quarter to $881.6 million, helped along by tequila sales from the Casa Herradura acquisition.
  • Earnings. Profits are also expected to grow 9% to $0.98 per share.

What management says:
Although wine has become a mainstay at American consumers' tables over the past decade -- consumption is up 30%, to more than 300 million gallons last year -- spirits remain the higher-octane fuel in Brown-Forman. A difficult economy here at home, however, has brought the distiller's international operations into greater focus, and their influence should continue to help Brown-Forman waft higher.

If fellow wine and spirits seller Diageo (NYSE:DEO) is any guide to what Brown-Forman will report, we should see a continuing movement by consumers away from beer sales, toward alcoholic beverages with a bigger punch. Diageo saw double-digit growth from Johnny Walker whisky, Captain Morgan rum, and Smirnoff vodka.

Given the strong sales Brown-Forman has amassed from Jack Daniel's whiskey, particularly abroad, this could be a heady quarter.

What management does:
However, Brown-Forman has seen margins slip in recent quarters, as higher costs, including fuel and grains, have offset gains the company made from favorable currency exchange rates. The Casa Herradura acquisition has the potential to boost margins in the future; premium brands should continue to support to the underlying business, even as the economy falters and lower-quality spirits suffer.

Margin

10/06

01/07

04/07

07/07

10/07

Gross

67.7%

67.6%

66.8%

66.2%

66.2%

Operating

27.0%

26.2%

26.6%

26.3%

26.4%

Net

20.3%

18.8%

17.5%

17.0%

16.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
With a stable of premium brands and a strong international flavor that has more room to grow in Russia, Japan, and South Africa, Brown-Forman can certainly increase both revenue and profits. However, from an investment standpoint, the company trades at a premium relative to Diageo, Constellation Brands (NYSE:STZ), and even Fortune Brands (NYSE:FO) on a trailing and forward basis. Any weakness as a result of higher costs could further deflate its stock.

Down more than 11% from recent highs, Brown-Forman's shares look like they've found their floor. Still, I'd err on the side of caution. A volatile market could anger the spirits and send shares down even more.

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