As the economy continues to loom into uncertainty, staying defensive is a not a bad option for any portfolio. Interestingly, just as tobacco will help investors with capital gains during times of both economic growth and slowdown, purchasing alcohol stocks will have similar effects. While the industry is not too large, and only includes only one American company with a market-cap over $10 billion, there is still a tremendous opportunity investing in one of these corporations. Noticeable companies in this industry include Molson Coors and Anheuser-Busch; however one stock, Brown-Forman Corporation (BF.B) really will catch the investor’s attention. Only an 8.82 billion dollar company, shareholders will still be optimistic about strong business foundation, excellent growth potential, and relatively interesting valuations.
Before plunging into Brown-Forman’s financial statements, an analysis is required to figure out what exactly this company does. According to Reuters, Brown-Forman “is a diversified producer and marketer of consumer beverage products.” The company produces many noticeable brands including Jack Daniel’s, Southern Comfort, and Fetzer. More particular to hard-liquor drinks including tequila, gin, table wine, and vodka, the company uses regional appeal (Kentucky, Tennessee and Canada) to further market its products. Since alcohol is a very inelastic good, demand will be high for Brown-Forman’s good regardless of the economic condition. Inelastic goods mean that a good will sell similar quantities regardless of slight changes of price, because consumers will always allocate income to this good. Since the current economy yields strong evidence of a slowdown, investing in companies like Brown-Forman is not a bad idea.
However, investors may ask why Brown-Forman should be preferred as a company to invest in instead of other alcohol brands. One reason is that Brown-Forman has great international exposure which ranges from Canada to Poland to South Africa to Japan. As the dollar continues to weaken, especially with interest rates ready to drop, exports will continue to rise helping sales grow in these foreign nations. This will escalate Brown-Forman’s already strong revenue figure of 2.81 billion dollars. In addition, this company’s share price has performed very well over the past five years. Not since 2001 has Brown-Forman had worse than a flat year, with a 22% increase in price in 2005 and a current share price appreciation of 8% in 2007. This 2007 number is very strong considering the poor track record of the rest of the market. Therefore, before even looking as far as the top line of this company’s financial statement, there is already strong evidence to purchase shares.
However, analysis on a company cannot just be on its business model and share price fluctuations. There must be more financial recognition involved. Fortunately for Brown-Forman, the growth story is a very positive one. With sales, according to Reuters, of 2.81 billion dollars compared to market-cap industry leaders such as Molson Coors’ revenue figure of 5.84, there is great expectations that a lower relative number should yield higher margins. This is the case for Brown-Forman. As of the past twelve months, Brown-Forman has seen sales growth 16.62%–a number far higher than the industry average 5.42%. This number was also higher than Constellation Brand’s 6.41% increase and Molson Coors’ 6.45% growth. Moreover, after including costs, there is strong evidence that Brown-Forman is very effective with the way it runs the company. Trailing gross margins at 52.33% are higher than the company’s five year average at 51.17%. In addition, the company also beats the industry average of 35.27%–a number below the current five year average of 38.87%. Moreover, operating margins at 21.17% are also not only higher than its five year average of 20.06%, but also higher than the industry’s 15.17% figure. Comparing these numbers to more specific corporations in this industry, and evidence illustrates that none of the three aforementioned industry competitors had margins better than Brown-Forman. This observation made, despite companies like Central European having much less revenue flowing in per year and only managing 21.09% in gross margins and 9.63% in operating margins.
In addition, growth is apparent for Brown-Forman all the way down to earnings. For the past five years, this company has managed to maintain an earnings growth rate of 14.11%. This number is better than the overall industry average at 9.21% and also better than Constellation’s and Molson Coors’ respective five year growth rates of 12.25% and 5.44%. These earnings come strongly, even though Brown-Forman’s capital spending over the past five years is solid at 3.09%. More spending in the present, while decreasing earnings and cash, does have the positive impact of allowing for more free cash in the future to be given to investors as dividends or stock repurchases. Thus, after going through margin growth and expected returns, there is strong evidence to support that Brown-Forman is growing and will continue to grow.
However, while growth prospects are a very important indicator of future success, valuation needs to also be taken into account. The alcoholic beverage industry currently has a P/E ratio of 19.41. Brown-Forman has an expected earnings multiple of 20.79 for fiscal year 2007. Now, before looking through more numbers, there are both positive and negative news from this comparison. It is true that this company is a bit overvalued to the rest of the industry as a whole. But since Brown-Forman is a growing company compared to the rest of the industry, it should be taken as a positive sign that investors feel confident about Brown’s future growth and are willing to invest money into this company. Price to sales is also a bit high for fiscal year 2007 at 2.84, but if there is strong evidence that this company will continue to growth, having overvalued multiples may not be so detrimental.
Nevertheless, these valuations may not be favorable to many investors. However, what should be favorable is the wealth of other positive financial facts of this company. As of last year ROE of 25% for Brown-Forman, while a bit below the industry, easily beats out all three of the aforementioned market-cap competitors. In addition, ROA and ROI respectively of 13.20% and 18.06% are also both higher than any of the three main competitors–not to mention higher than the respective industry averages of 5.93% and 6.95%. A current ratio of 1.31, above the industry average of 1.10, illustrates the solvency of the company and the future availability of more cash. Debt to equity is also very small, illustrating that this company is not very risky, but still maintains strong growth using a majority of equity. Asset turnover of 0.96 is also quite good, while inventory and receivable turnover at 2.18 and 8.03 are also not bad–doing better than other competitors like Constellation. Probably even more important to the investor, dividend yields of 1.69% are solid. Competitor Molson Coors only had a 1.43% yield, and Constellation and Central European did not even give any dividends to investors.
Therefore, after reviewing the business model, growth potential, and valuation of Brown-Forman, there are many good reasons why investors should be interested in this company. Technically speaking, now may be a good time to purchase some shares, even though this company should be viewed as a long-term investment. However, the parabolic SAR is above the current share price, and both stochastic and RSI indicators are also below the 50 range. Therefore, given all the provided information, there is much evidence to support the idea that investing in Brown-Forman would be a wise decision.