We have maintained our long-term Neutral recommendation on Brown-Forman Corporation , one of the leading producers and distributors of premium alcoholic beverages in the world, with a target price of $72.00. Moreover, the company holds a Zacks Rank #3 (Hold).
We remain impressed with the company’s positive earnings surprise trend, strong organic revenue growth and impressive management guidance. However, on the other hand, intense competition from private players and rising commodity costs make us cautious on the stock.
The third quarter fiscal 2013 earnings of 73 cents per share at Brown-Forman exhibited an improvement of 18% from the comparable year-ago quarter as well as the Zacks Consensus Estimate of 70 cents. The year-over-year increase was primarily driven strong top-line growth along with improved margins.
Looking at the earnings surprise history, the company has surpassed the Zacks Consensus Estimates thrice in the trailing four quarters. The average positive surprise in the trailing 4 quarters comes to 3.6%.
Brown-Forman now projects fiscal 2013 earnings between $2.60 and $2.68 per share. The current Zacks Consensus Estimate stands at $2.68 per share, which is in line with the upper end of company’s guidance range.
Moreover, Brown-Forman continues to expect operating income in the low-double-digits range, while underlying sales are expected to increase in the high-single-digit range.
Apart from the strong third-quarter results, Brown-Forman’s growth story looks compelling. We believe that the company’s sustained focus on pricing, product innovation and expanding operations in the emerging markets will likely boost operational performance.
On the flip side, stiff competition from other alcoholic beverage companies, such as Diageo plc along with potential risk of operating in overseas market may have an adverse effect on Brown-Forman’s operations. Moreover, we believe that the shares of the company are richly valued at the current juncture, which limits its upside potential. Brown-Forman currently trades at a forward P/E of 25.83x, substantially premium from the peer group average of 20.28x.
Further, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., Europe and many emerging markets may increase the risk of a potential rise in excise tax on spirits by governments of respective countries. A hike in excise tax in the future may have an adverse effect on Brown-Forman’s financial performance.
Other Stocks Worth Considering
Other stocks worth considering in the alcoholic beverage industry are Companhia de Bebidas Das Americas aka AMBEV and Molson Coors Brewing Company . Both the companies carry a Zacks Rank #2 (Buy).