Will Brown-Forman Fall Down Against Diageo and Constellation Brands?

Brown-Forman (NYSE: BF-A) (NYSE: BF-B) will release its quarterly report on Wednesday, and investors have generally been quite pleased with the performance of the spirits company, sending its stock to all-time record highs. But as competition from rivals Diageo (DEO 0.10%) and Constellation Brands (STZ 2.08%) becomes ever tougher, the bigger question is whether Brown-Forman can keep earnings growing even if its revenue doesn't climb as fast as its peers' sales.

Brown-Forman isn't a household name, but its Jack Daniel's and Southern Comfort brands are well-known among liquor aficionados, and it also has the Sonoma-Cutrer vineyards and the Korbel champagne brand under its umbrella. Like Diageo and Constellation Brands, Brown-Forman has done a good job of making the most of its potential over the long run even despite the interruption of the 2008 recession. But can Brown-Forman keep climbing in concert with its rivals, or will competitive pressures eventually create both winners and losers in the industry? Let's take an early look at what's been happening with Brown-Forman over the past quarter and what we're likely to see in its report.

Stats on Brown-Forman

Source: Yahoo! Finance.

Which way will Brown-Forman earnings move this quarter?
In recent months, analysts haven't budged on their views of Brown-Forman's earnings, keeping both short-term and long-range projections on earnings per share unchanged. The stock has done well, though, rising almost 10% since late August.

Brown-Forman's fiscal first-quarter report in August was mildly disappointing, with mild drops in operating income and earnings per share coming from muted net sales growth of just 2%. The company saw extraordinary growth in its Korbel segment as well as from super- and ultra-premium whiskey brands, with Woodford Reserve leading the way with 25% growth. Worldwide, revenue growth was relatively consistent except for Australia, which saw about a 5% drop in underlying sales.

Brown-Forman has taken steps to try to keep up with rising demand for its products. In August, the company said it would expand its Lynchburg Jack Daniel Distillery, spending more than $100 million to boost capacity for what has become the company's most important segment. As international growth becomes an essential component of Brown-Forman's long-term strategy, having more Jack Daniel's products to send to thirsty customers in key areas like Eastern Europe and Russia could set the stage for accelerating gains in the future. A realignment of Brown-Forman's Asia-Pacific business structure in October also recognizes the importance of the region to the company's overall growth potential globally.

One concern that Brown-Forman might not need to worry about at least for now is the prospect of further consolidation in the space. For a while, it appeared that Diageo might move forward to try to buy out Brown-Forman whiskey rival Beam (BEAM +0.00%). But Diageo CEO Ivan Menezes dismissed talk of a merger, saying it was unnecessary in light of Diageo's already-strong Johnnie Walker brand and other offerings. As for Constellation Brands, its recent move to pick up the Grupo Modelo U.S. beer business has likely left it needing some time before considering any further major corporate moves in the near future.

In the Brown-Forman earnings report, watch to see if the company makes further plans to bolster growth. With the threat of getting left behind by Diageo and Constellation, Brown-Forman needs to demonstrate that it will continue to play in the same league as its competitors both now and well into the future.

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