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Balanced Risk-Reward for Brown-Forman (BF.B): Stock Gains

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Brown-Forman Corp. BF.B has displayed positive momentum, driven by strength across its brand portfolio and geographies, which is aiding bottom-line performance. Notably, the company reported earnings beat for the ninth straight time in first-quarter fiscal 2020. Additionally, it is confident of capitalizing on its American Whiskey strategy, with continued benefits from investments in the brand portfolio. These factors have not only aided its quarterly outcome but also boosted the share price, with gain of 31.9% recorded in the past year. This performance is well ahead of the industry’s growth of 7.7% for the same period.


However, Brown-Forman’s top-line performance continues to be plagued by the ongoing tariff-related perils as well as higher input costs across the industry. Tariff-related buy-ins and the timing of customer orders impacted sales in the last reported quarter, which marked the fourth straight quarter of sales miss for the company. This along with higher input costs are hurting its gross margin, which should persist throughout fiscal 2020. With these headwinds on the plate, let’s see how this Louisville, KY-based alcoholic beverages company will retain stock momentum.

Factors Favoring the Stock

Brown-Forman’s strong portfolio of globally recognized brands, including the Jack Daniels family of brands, positions it well in the alcohol beverage space. It currently owns and produces a multitude of popular spirit brands, including Jack Daniels, Southern Comfort and Finlandia Vodka. We expect the company’s continued focus on pricing, product innovation and expanding operations in emerging markets to boost operational performance and further strengthen market position.

In fact, broad-based growth across Brown-Forman’s brand portfolio and geographies, particularly with strength in the United States — its largest market, primarily aided results in the last reported quarter. Underlying sales in the United States improved 4% on continued double-digit growth from its premium bourbons, Woodford Reserve and Old Forester, and high-single-digit underlying net sales growth in aggregate from tequilas, Herradura and el Jimador.

Further, the company is focused on investing in the diversification of its brand portfolio to drive growth. For more than a decade, the Jack Daniel's Tennessee Whiskey has been the key contributor of growth in the United States. The company’s investments in brands center around the broadening of the Jack Daniel’s family of brands while also exiting the weaker brands and expanding the fast-growing premium spirit categories.

The company is also investing in organically accelerating growth of two fast-growing spirit categories, bourbon and tequila. The Woodford Reserve and the Old Forester trademarks are mainly driving growth of the bourbon category in the United States. Further, the tequila portfolio in the United States is gaining from strong performance of the Herradura and el Jimador brands. These balanced portfolio investments are supporting the company’s track record of consistent growth.

Notably, underlying sales growth across Brown-Forman’s portfolio in first-quarter fiscal 2020 was led by Herradura, which reported 22% underlying sales growth. Underlying sales for the company’s premium bourbon brands, including Woodford Reserve and Old Forester, grew 16% while el Jimador grew 10%. However, underlying net sales for the Jack Daniel’s family of brands declined 1% globally, driven by impacts of tariff-related buy-ins and net pricing reductions.

Factors Hindering Growth

Though the aforementioned factors keep us optimistic about the stock’s potential, there remain some hurdles in its growth path. The most prominent among these are the ongoing impacts of tariffs and timing of customer orders on the top line, particularly in emerging and international markets.

Notably, tariff-related buy-ins, which occurred in first-quarter fiscal 2019, affected underlying net sales growth in emerging and developed international markets by nearly three percentage points and six percentage points, respectively. Further, underlying sales for the company’s Jack Daniel’s family of brands included about three percentage points of negative impact of last year’s tariff-related buy-ins and related net pricing reductions.

Moreover, the company expects tariff-related expenses along with higher input costs to remain a headwind to gross margin growth throughout fiscal 2020. Consequently, it expects gross margin to decline nearly 200 basis points for fiscal 2020. Further, the company expects cost of tariffs to remain a drag on its gross margin and bottom line in the fiscal second quarter.

Wrapping Up

The above discussion clearly shows that Brown-Forman has balanced risk-reward, with growth efforts likely to offset hurdles. Further, the Zacks Rank #3 (Hold) company’s expected long-term earnings growth rate of 7.5% and a Momentum Score of B speak well of its growth potential.

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