Brown-Forman's Results Smooth but Shares Expensive

 Brown-Forman (BF.B) began its fiscal year on a strong footing, with underlying net sales growing 9% and operating margin expanding 50 basis points to 34.5%. International markets continued to fuel top-line growth, with underlying sales growing 16% in developed international regions and 11% in emerging markets. Further, the Jack Daniel's family of brands posted 10% underlying growth (which was particularly impressive given a 6% increase the year prior), as offerings like Jack Daniel's Tennessee Honey and Fire gained further traction with consumers. We expect these offerings will help grow the Jack Daniel's customer base longer term, given their appeal to consumers who don't typically drink whiskey. We contend that in order to support these line extensions, as well as new product offerings, the company will bolster its investments in its brands, as evidenced by advertising expenditures ticking up to 12.8% of sales from roughly 12% in the prior year period.

While we're not blind to the uncertainty posed by tariffs over the coming quarters, we continue to think that the company's substantial brand equity (which underpins our view of its wide moat) should help it leverage pricing to offset tariff pressures longer term. In markets affected by tariffs, the company plans for delayed price increases in order for the pricing of its offerings to remain competitive with its peer set, though this may weigh on near-term gross margin. In this context, we plan to slightly lower our bottom-line outlook for the year, as our $1.81 earnings per share estimate falls above management's revised range of $1.65 to $1.75 ($1.75 to $1.85 prior). However, we expect this change to be more than offset by the time value of money and consequently don't expect a significant change to our $45 fair value estimate. Moreover, our longer-term outlook, which calls for mid-single-digit net sales growth and around 35% operating margin on average, remains intact.