Earnings Preview: Brown-Forman

Brown-Forman Corporation ( BF.B - Analyst Report ) is scheduled to report its financial results for the first quarter of fiscal 2013 before the opening bell on August 29, 2012. The current Zacks Consensus Estimate for the quarter is 62 cents per share. For the quarter under review, revenue is expected to be $893 million, according to the Zacks Consensus Estimate.

With respect to earnings surprises, Brown-Forman has missed the estimate thrice over the trailing four quarters in the range of flat to negative 7.5%. The average surprise over the last four quarters remained at negative 4.4%.

Fourth-Quarter 2012 - A Synopsis

Brown-Forman’s adjusted earnings of 73 cents per share for the fourth quarter of fiscal 2012 missed the Zacks Consensus Estimate of 76 cents and declined approximately 5.2% from the year-ago earnings of 77 cents. A higher excise tax along with increased operating expenses affected the company’s bottom line.

Brown-Forman's reported net sales inched up 1% to $801.3 million, missing the Zacks Consensus Estimate of $805 million. However, the company’s underlying net sales registered 10% growth year over year.

Zacks Consensus

The analysts following the stock expect Brown-Forman to post first quarter earnings of 62 cents a share, higher than 54 cents delivered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between 57 cents and 66 cents a share.

For fiscal 2013, the Zacks Consensus Estimate stands at $2.61 per share, higher than the year-ago fiscal earnings of $2.37. The current estimate ranges between $2.57 and $2.67 per share.

Earnings Estimate Revisions

Agreement

For the first quarter of fiscal 2013, of the 6 analysts providing estimates, none has revised their estimates in either direction over the last 7 and 30 days.

For fiscal 2013, 1 analyst downgraded its estimate in the last 30 days, while no movement seen in the opposite direction. In the last 7 days, of the 6 analysts providing estimates, none has revised their estimates in either direction.

Magnitude

The magnitude of estimate revisions for Brown-Forman depicts a neutral outlook for the first quarter and fiscal 2013. Over the last 7 and 30 days, estimates for the upcoming quarter and fiscal 2013 have remained unchanged at 62 cents and $2.61 per share, respectively.

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. We believe this provides a competitive edge to the company and bolsters its well-established position in the market.

Moreover, we believe Brown-Forman’s strategy of expanding Jack Daniel's market share in 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.

However, apart from macroeconomic headwinds, 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 the governments of respective countries. The effect of any excise tax increase in future may have an adverse effect on Brown-Forman’s financial performance.

Above all, the company faces intense competition from other well-established players in the industry, including Beam Inc. ( BEAM - Snapshot Report ) , Constellation Brands Inc. ( STZ - Analyst Report ) and Diageo plc ( DEO - Analyst Report ) . Moreover, Brown-Forman encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

Currently, Brown-Forman has a Zacks #3 Rank, which implies a short-term Hold rating. Moreover, we maintain a long-term ‘Neutral’ recommendation on the stock.