Brown-Forman Corporation (NYSE:BF.B) is known in the financial market for its strong alcoholic beverage brands, including Jack Daniel’s, Herradura, Woodford Reserve, Fords Gin, and Sonoma-Cutrer. The company has a rich history of steadily growing revenues through strategic brand management and selective acquisitions, such as the recent addition of the Diplomatico Rum brand in late 2022.
Over the past decade, Brown-Forman’s stock has seen a commendable appreciation, with a fair CAGR of 7.1%, accompanied by a dividend yield of 1.48%.
Brown-Forman has maintained a modest yet consistent revenue growth. From FY2003 to FY2023, the company achieved a compounded annual growth rate of 3.7%, showing a clear acceleration in recent years, particularly fueled by inflation.
With a guided growth of 5% to 7% for FY2024, driven mainly by increased pricing due to inflation, Brown-Forman anticipates marginal volume growth. The company’s stable EBIT margin, averaging 29.2% from FY2003 to FY2023, has also been a consistent feature, even in the face of inflation and demand challenges.
While Q1/FY2024 saw a slight year-over-year dip in EBIT margin due to extensive marketing expenses from a collaboration with Coca-Cola, Brown-Forman foresees a 6% to 8% operating income growth for FY2024, hinting at a marginal margin expansion.
Selected Product Growth
Amidst largely flat Q1 results, Brown-Forman witnessed robust growth in products like Jack Daniel’s new Tennessee Apple whiskey, El Jimador, and ready-to-drink mixed drinks. The tequila segment, driven by El Jimador, experienced a commendable 12% organic year-over-year growth, while the collaboration between Coca-Cola and the Jack Daniel’s brand in the ready-to-drink category also contributed to a 5% growth. This product is seen as a key contributor to future growth as it expands into new markets.
Despite the company’s stable performance and promising growth catalysts, Brown-Forman’s excessive forward P/E multiple of 28.4 raises concerns. A detailed discounted cash flow model estimates the fair value at $27.34, indicating a significant downside of 53% from the current stock price. When compared to similar industry players like Constellation Brands, MGP Ingredients, Diageo, and the Duckhorn Portfolio, Brown-Forman’s premium valuation of 67% seems exorbitant.
Brown-Forman’s inflated valuation in the face of stable financials presents a challenging investment scenario. The stock’s current risk-to-reward balance is deemed unfavorable, and unless a substantial correction occurs, investors may want to consider a sell rating.