Brown-Forman Stays Neutral

We are maintaining our long-term Neutral recommendation on Brown-Forman Corporation (BF.B - Analyst Report). Moreover, the company has a Zacks #3 Rank implying a short-term Hold rating.

Battered by higher excise tax along with increased operating expenses, Brown-Forman reported a weak fourth-quarter 2012 results with earnings falling 5.2% to 73 cents per share, missing the Zacks Consensus Estimate of 76 cents. Moreover, the company’s net sales of $801.3 million also fell short of the Zacks Consensus Estimate of $805 million, but managed to register a year- over-year growth of 1%.

Moreover,gross profit margin shrunk 90 basis points (bps) to 52.6% due to increased excise taxes, while higher advertising and selling, general and administrative (SG&A) expenses led to a contraction of 60 bps in operating margin to 19.6%.

However, Brown-Forman expects solid improvement in customer trends in the remaining period of fiscal 2013. Moreover, based on high-single digit growth expectation in net sales and operating income, the company anticipates fiscal 2013 earnings in the range of $3.60 to $4.00 per share.

Further, we believe Brown-Forman’s strategy of expanding Jack Daniel's market share in the developed markets, such as France and the U.S., and emerging markets including Russia, Poland and Mexico, where the whiskey category is in early stages of development, will boost its top line. In addition, the company’s plan to build new cooperage for manufacturing barrels for Jack Daniel’s Tennessee Whiskey will facilitate it in continuing supply of this premium whiskey along with its demand.

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.

However, continued macroeconomic headwinds and the resultant cutback in discretionary spending along with intense competition from other well-established players in the industry, including Beam Inc. (BEAM - Snapshot Report) and Diageo plc (DEO - Analyst Report) may weigh upon the company’s growth prospects.