One of the world’s leading producers and distributors of premium alcoholic beverages, Brown-Forman Corporation (BF.B), recently posted its fourth-quarter 2011 results. The street analysts had nearly a week to ponder on the news. In the subsequent paragraphs that follow, we will cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.
Quarterly Review
On June 09, 2011, Brown-Forman reported fourth-quarter 2011 earnings of $1.13 a share compared with 49 cents in the year-ago quarter. The Zacks Consensus Estimate for the quarter was 64 cents a share. The robust increase in quarterly earnings was primarily driven by strong top-line growth and improved margin along with benefit from sale of Hopland based wine business and low tax rate.
Brown-Forman’s net sales recorded a growth of 8.0% to $791.3 million from $733.0 million in the prior-year quarter. The growth was primarily attributable to solid performance in Australia, the U.K., Mexico, Turkey, Germany, and France.
During the quarter, Brown-Forman’s gross profit grew 12.0% from the prior-year quarter to $423.3 million, while gross margin increased 200 basis points (bps) year over year to 53.5%. Advertising expense climbed 11.0% year over year to $99.7 million, primarily due to higher spending to support Jack Daniel’s Tennessee Honey brand.
Selling, general and administrative expenses inched up 1.0% year over year to $166.9 million. Conversely, Brown-Forman’s operating profit surged 87.0% from the prior-year quarter to $221.9 million, while operating margin expanded 1.73 times to 28.0% from the prior-year period.
Management’s Guidance for 2012
Brown-Forman anticipates moderate improvement in global economic conditions and customer trends in fiscal 2012. Accordingly, the company has delivered its earnings guidance in the range of $3.45 to $3.85 per share.
(Read our full coverage on this earnings report: Brown-Forman’s Profit Surges)
Agreement of Analysts
Estimate revision trends for the upcoming first-quarter 2012 portrayed a mixed sentiment among the analysts covering the stock. However, for the second quarter of fiscal 2012, analysts have a negative outlook on the stock. Over the last 7 days, 2 out of 6 analysts following the stock revisited their estimates, of which 1 downgraded while the other has upgraded their estimates for the first quarter of 2012. Moreover, for second-quarter 2012, 2 analysts revisited and have downgraded their estimates in the last 7 days.
For fiscals 2012 and 2013, estimate revision trends remain almost constant among most of the analysts covering the stock. Over the last 7 days, 1 out of 6 analysts following the stock revisited its estimate and have upgraded for fiscal 2012. Besides, for fiscal 2013, not a single analyst has revisited their estimates.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Brown-Forman remains unchanged over the last 7 days at 84 cents per share for first-quarter 2012. However, estimated earnings for second-quarter 2012 have been slashed by a penny to $1.12 per share. Over the last 7 days, magnitude of estimate revisions for fiscal 2012 depicts an optimistic outlook and has been increased by 1 cent to $3.73 per share. However, estimated earnings for fiscal 2013 have remained unchanged at $4.05 per share.
Our Recommendation
Brown-Forman is one of the leading producers and distributors of premium alcoholic beverages in the world. The company commands a strong portfolio of globally recognized brands, such as Jack Daniel’s, Finlandia, Southern Comfort and Canadian Mist. This provides a competitive edge to the company and bolsters its well-established position in the market. Moreover, the company plans to expand Jack Daniel’s market share in the developed markets, such as France and the U.S., and emerging markets such as Russia, Poland, and Mexico, where the whiskey category is in early stages of development. In the near future, the company also seeks to expand the sphere of other brands, such as Gentleman Jack, Jack Daniel’s Single Barrel and Jack Daniel’s ready-to-drinks within Jack Daniel.
However, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by governments of respective countries. The effect of any excise tax increase in future may have an adverse effect on Fortune’s financial performance. Furthermore, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.
Above all, Brown-Forman faces intense competition from other well-established players in the industry, including Fortune Brands Inc. (FO), Constellation Brands Inc. (STZ), and Diageo plc. (DEO). Moreover, Brown-Forman also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future performance.
Brown-Formancurrently holds a Zacks #2 Rank, implying a short-term ‘Buy’ rating on the stock. Besides, the company retains a long-term ‘Outperform’ recommendation on the stock.
BROWN FORMAN B (BF.B): Free Stock Analysis Report
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