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Why Is Brown-Forman (BF.B) Up 3.4% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Brown-Forman Corporation (BF.B - Free Report) . Shares have added about 3.4% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is BF.B due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Brown-Forman Q3 Earnings & Sales Beat, Revises View

Brown-Forman delivered robust third-quarter fiscal 2018, wherein both earnings and sales topped estimates. This marked the company’s third straight quarter of earnings and sales beat. Adjusted earnings of 44 cents jumped nearly 15.8% and surpassed the Zacks Consensus Estimate of 41 cents.

Net sales improved about 9% year over year to $878 million, after deducting excise taxes. However, on an underlying basis (excluding negative currency impact and other adjustments), sales increased 6% that marked the sixth straight quarterly growth. Moreover, the company’s sales, before accounting for excise taxes, were $1,156 million, up 9.2% from the prior-year figure of $1,059 million. The Zacks Consensus Estimate was pegged at $872.3 million.

The company’s robust underlying sales performance can be attributed to the persistent momentum in its focus categories and strength in Jack Daniels led by premium American whiskey portfolio. Further, net sales gained from balanced growth across geographies.

Quarter in Detail

Brown-Forman’s gross profit increased nearly 9% to $587 million, while gross margin expanded 60 basis points (bps) to 66.9%.

Selling, general and administrative (SG&A) expenses increased about 7% year over year to $173 million. Additionally, advertising expenses rose 11% year over year to $114 million. The rise in advertising costs can be attributed to the rise in investments for the Jack Daniels family of brands and further growth of the fast-growing bourbon and tequila brands.

Despite the rise in expenses, operating income grew 11% to $304 million, with operating margin expanding 80 bps to 34.6%. On an underlying basis, operating income of the company increased 5%.

Balance Sheet & Cash Flow

Brown-Forman ended the quarter with cash and cash equivalents of $287 million and long-term debt of $1,770 million. The company’s total shareholders’ equity was $1,201 million as of Jan 31, 2018.

In first nine months of fiscal 2018, the company generated $562 million cash from operating activities.

On Jan 23, the company declared a five-for-four stock split, which was paid on Feb 28, 2018. In connection with the stock split, the company also announced a special dividend of $1.00 on split adjusted Class An and Class B stock. This dividend will be paid on Apr 23, to shareholders with record as on Apr 2.

Further, the company declared a quarterly cash dividend of 15.8 cents per share on a split-adjusted basis, which is payable on Apr 2, to shareholders of record as on Mar 5.

Fiscal 2018 Guidance

While the global economic environment has improved modestly in the past year, the company anticipates continued volatility in the emerging markets. Further, the company notes that competition intensified in the developed economies, which can hinder results.

However, the company believes that it is on track to deliver high-quality, top-tier results in fiscal 2018 based on the accelerated growth rates. The company is also confident about delivering solid top-line growth in fiscal 2018 driven by the strength of its premium American whiskey portfolio. Further, the company expects earnings and cash flows to benefit in future due to the new tax reform.

Consequently, the company reiterated its underlying sales and operating income forecasts for fiscal 2018, while it updated the earnings view to account for the new tax reform.

Management continues to project underlying sales growth of 6-7%. In fiscal 2018, the company expects a moderate increase in SG&A expense on an underlying basis driven by compensation related expenses. Further, underlying A&P growth is anticipated to be nearly in line with sales growth.

Despite the higher costs, underlying operating income is anticipated to increase 8-9%. Further, the company now estimates earnings per share of $1.43-$1.48, including 3 cents negative impact from the tax reform, 10 cents impact from expenses related to the creation of charitable foundation and 3 cents from foreign exchange benefit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter. Last month, the consensus estimate has shifted downward by 25.6% due to these changes.

Brown-Forman Corporation Price and Consensus

 

VGM Scores

At this time, BF.B has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. Following the exact same course, the stock was also allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, BF.B has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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