Skip to Content
Stock Analyst Update

Brown-Forman Can Overcome Headwinds

Despite near-term challenges, we see substantial opportunity in the above-premium whiskey market and contend that the wide-moat company will be a beneficiary of strong consumer demand for higher-end spirits.

Mentioned:

Wide-moat  Brown-Forman (BF.B) reported fiscal 2017 results slightly below our expectations, with net sales for the year down roughly 3% compared with our negative 1.5% estimate, due to stronger-than-expected currency headwinds and a smaller comparable revenue base following the divestiture of the Southern Comfort and Tuaca brands at the end of fiscal 2016. Despite these near-term challenges, we continue to see substantial opportunity in the above-premium whiskey market and contend that Brown-Forman will be a beneficiary of strong consumer demand for higher-end spirits, particularly as it capitalizes on Jack Daniel’s brand equity through the introduction of Tennessee Rye and expands into the fast-growing Irish whiskey market (which posted high-teens domestic volume growth in 2016, according to the Distilled Spirits Council) with the launch of Slane Irish Whiskey. We plan to adjust our $44 fair value estimate upward by a few dollars as we incorporate the benefit of the time value of money and lower effective tax rates (based on expected U.S. corporate tax reform in 2018), which will offset a tempered short-term outlook. 

While we expect foreign exchange pressure to persist into the beginning of fiscal 2018, an increasing proportion of sales from more premium brands (sales of mainstream offerings Canadian Mist and Early Times continued to decline over the year) should yield positive price/mix effects. We were pleased to see a return to growth in the Travel Retail channel (up 3% year over year), which, by our estimates, contributes 3%-4% of revenue, thanks to increased distribution of Woodford Reserve and improved trends in European travel (around one third of travel retail segment). Although annual gross margin of 67.5% was weaker than we had expected (down 190 basis points over last year and 200 basis points below our forecast), we expect sustained growth in higher-margin, super-premium products will allow for strengthened profitability in fiscal 2018 and beyond.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.