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Brown-Forman: Still growth ahead

Opdateret: 3. dec. 2023


Brown-Forman has been in existence for more than 150 years. Thus, the company has survived world wars, economic depressions, and pandemics. The company is still going strong and still has plenty of potential to grow moving forward. Furthermore, since it operates in the alcoholic beverage industry, it should be considered resilient during economic downturns, which may loom on the horizon. In this analysis, I will investigate whether now is the time to invest in Brown-Forman.


This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Brown-Forman. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either. I should also mention that Brown-Forman has been on my watchlist for years, so it is a company that I like. Nonetheless, I will keep this analysis unbiased. You can purchase Brown-Forman shares or fractional shares on eToro. eToro is a highly user-friendly platform that allows you to get started with as little as $50.



Brown-Forman was founded in 1870 in Louisville, Kentucky, United States by George Garvin Brown. The Brown family still owns approximately 51% of the company. Brown-Forman is one of the largest alcoholic beverage companies in the world. They engage in the manufacturing, distilling, bottling, importing, exporting, marketing, and selling of a wide range of beverage alcohol products, including whisky, whiskey, tequila, rum, gin, liqueur, wine, and ready-to-drink cocktails. Brown-Forman owns more than 40 brands, but their most well-known brands are Jack Daniels, Herradura, Diplomatico, and Gin Mare. They sell their products in more than 170 countries worldwide, with their largest market being the United States, where they generate 47% of their sales. Jack Daniels is their most valuable brand, as it has been named the most valuable spirits brand in the world. These brands are what give Brown-Forman a moat.


Their CEO is Lawson Whiting. He joined Brown-Forman in 1997 and held various positions before becoming the CEO in 2019. He holds a Bachelor of Science degree in Finance from Miami University and a Master of Business Administration from the University of Chicago's Booth School of Business. We don't have much information about Lawson Whiting, but he definitely has a lot of experience in the company and the industry, as he has held various roles since 1997. The Chairman of the Board, Campbell P. Brown, has stated that Lawson Whiting embodies the performance-driven and values-oriented culture of Brown-Forman through both his words and actions. He further noted that the Brown family and shareholders should be grateful for all that Lawson Whiting contributes with his many talents to improve Brown-Forman. Lawson Whiting also scores high on Comparably, with an employee rating of 79/100, placing him in the top 10% of businesses of similar size. Personally, I also appreciate the swift action taken by him and the rest of the leadership in approving a $400 million share repurchase authorization when Brown-Forman shares were trading at a 52-week low. Hence, although we don't have much information on Lawson Whiting, I feel confident in his ability to lead Brown-Forman moving forward due to his extensive experience in the company and the industry. Furthermore, I appreciate that the Board of Directors, where Lawson Whiting also serves, acts quickly when opportunities arise.


I believe that Brown-Forman has a strong brand moat. I have confidence in the management, even though I don't have much information about the CEO. Now, let us investigate the numbers to determine if Brown-Forman meets our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. Brown-Forman has consistently achieved a solid return on invested capital (ROIC) above 10% for the past 10 years. It is, however, slightly concerning that ROIC has decreased since 2019 and reached its lowest level in fiscal 2023. However, Brown-Forman acquired both Gin Mare and Diplomatico in fiscal 2023, which contributed to the contraction of ROIC in that year. Furthermore, fiscal year 2023 has been challenging for most companies due to macroeconomic factors. Thus, I'm not overly concerned about the low ROIC in fiscal 2023, but I would like to see it increase in the future. Ideally, Brown-Forman will reach the 20% ROIC level again at some point.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are a bit mixed, as there are years where the equity has decreased and others where it has increased. I believe it is natural for a company like Brown-Forman to sell or acquire brands. For instance, they purchased Gin Mare and Diplomatico in fiscal year 2023, while they sold the Southern Comfort and Tuaca brands in 2016, just to mention a few. So, while we may see fluctuations in the numbers going forward, it is encouraging to note that Brown-Forman has consistently increased its equity every year since 2018.



Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. What comes to mind is that the free cash flow is positive in all years, which is always pleasing to see. Free cash flow reached record levels in 2021 and 2022 but decreased in fiscal 2023 due to the inflationary environment and recent acquisitions. Levered free cash flow margin and free cash flow yield also reached lows in 2023 due to the challenging macroeconomic environment. If macroeconomics improve, so should Brown-Forman's free cash flow. Thus, I'm not concerned about the numbers in fiscal 2023, as I anticipate an improvement in macroeconomics at some point.



Another important aspect to consider is the level of debt. It is crucial to determine whether a business has a manageable debt that can be repaid within a three-year period. This can be assessed by calculating the ratio of long-term debt to earnings. After performing the calculation on Brown-Forman, I have determined that the company has a debt-to-earnings ratio of 3,42 years, which exceeds the limit of 3 years. It is slightly higher than I would prefer, and although it is not yet cause for alarm, it is something that should be monitored. The high debt affects the return on invested capital (ROIC) of Brown-Forman. Below, you can see the Return on Equity (ROE) in the last 10 years, which will give you an idea of how debt has impacted the Return on Invested Capital (ROIC).




Like any other investment, there are risks associated with investing in Brown-Forman. One risk is macroeconomics. In the annual report, Brown-Forman states that if there is a significant decline in economic conditions, such as economic slowdowns or recessions, higher unemployment rates, inflationary pressures, or disruptions to credit and capital markets, it could result in reduced consumer confidence in specific countries and overall consumer spending. Consequently, this would lead to a decrease in consumer demand for our products. Furthermore, management has mentioned that they remain cautious due to the current macroeconomic volatility and the potential impact of inflation on consumer spending. This means that macroeconomic factors may continue to affect Brown-Forman for some time. Another risk is competition. Brown-Forman is facing substantial competition from various international companies, as well as regional and local companies. Brown-Forman has mentioned that increased competition, as more brands enter the market, could negatively affect demand for their products. Furthermore, some of their competitors have mentioned that there has been a recent increase in competition for distribution channels, particularly e-commerce channels. This is another aspect of the heightened competition. Thus, increased competition may, among other things, negatively impact their ability to maintain or gain market share. Regulations. Brown-Forman operates in the alcoholic beverages industry, which is a sector that is constantly exposed to potential regulations. In their annual report, Brown-Forman mentions that various jurisdictions have adopted or may seek to adopt significant additional product labeling or warning requirements, as well as impose limitations on the availability of their products. These measures are related to the content or perceived adverse health consequences of some of their products. Thus, if we see that new regulations could affect the results of Brown-Forman.


There is also a lot of potential for Brown-Forman in the future. One is premiumization. According to Grand View Research, premiumization has been a long-term trend, and the global market for premium spirits is expected to grow at a compounded annual growth rate of 10,3% until 2027. Brown-Forman believes that premiumization provides the best opportunity for long-term growth and innovation, which is why they acquired Gin Mare and Diplomatico. These new brands have increased net sales by 2%. Brown-Forman expects that these two new brands, along with their other premium brands, will significantly contribute to their long-term growth. Their tequila portfolio. According to Brown-Forman, their tequila portfolio is the most attractive and fastest-growing category in the full-strength total distilled spirits market. Consumers are increasingly shifting towards more premium tequila products. Euromonitor has found that tequila is the fastest-growing spirits category worldwide, with a forecasted impressive 27% compound annual growth rate (CAGR). This data supports Brown-Forman's assertion. Furthermore, there has been a significant decrease in the cost of agave, which should enhance profitability for tequila products in the future. Brown-Forman owns two premium tequila brands: Herradura and El Jimador. Ready-to-drink portfolio. Brown-Forman recently launched a ready-to-drink cocktail featuring Jack Daniel's and Coca-Cola in collaboration with Coca-Cola. The launch has been the most successful in the history of Brown-Forman, and they are planning to introduce the product in additional markets soon. The Jack Daniel's and Coca-Cola ready-to-drink cocktail has already gained a 2% market share in just a few months, and management has expressed excitement about its long-term potential. Furthermore, CEO Lawson Whiting mentioned that consumers are willing to pay more, substantially more for a spirit-based ready-to-drink than a malt-based ready-to-drink. If he is right, this should benefit Brown-Forman.



Now it is time to calculate the price of shares in Brown-Forman. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,63, which is from fiscal 2023. I have selected a projected future EPS growth rate of 7%. (management expects between 6-8% growth). Additionally, I have chosen a projected future P/E ratio of 14, which is twice the growth rate. This decision is based on the fact that Brown-Forman has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $11,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Brown-Forman at a price of $5,55 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 505 and capital expenditures were 199. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 139 in our calculations. The tax provision was 225. We have 479,382 outstanding shares. Hence, the calculation will be as follows: (505 – 139 + 225) / 479,382 x 10 = $12,32 in Ten Cap price.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Brown-Forman's Free Cash Flow Per Share at $0,95 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $10,43.


Brown-Forman is an interesting company. They have a strong competitive advantage and I have confidence in the management. Brown-Forman may face prolonged macroeconomic headwinds, which could affect the results for some time. However, it is expected that macroeconomics will eventually improve. Competition and regulations will always pose a long-term risk for Brown-Forman. I'm not overly concerned about competition because Brown-Forman has been in business for more than 150 years, thanks to their strong brand portfolio. We may see increased regulations moving forward, as we have seen with other products such as tobacco, but it is hard to predict. It is something that needs to be monitored if you are investing in the industry, though. Brown-Forman has plenty of potential for growth. I believe that prioritizing premiumization is a wise decision, as it appears that customers have a preference for high-quality products, even in the current economic climate. Brown-Forman also has plenty of exposure to the fast-growing tequila trend, and their ready-to-drink launch with Coca-Cola has been a success. I would love to purchase shares in Brown-Forman, but I would only do so at the intrinsic value of the Ten Cap price, which is $24,64. It may never reach that price, and if that's the case, I will have to explore other investment options.


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