Brown-Forman Earnings: Premiumization Still a Long-Term Positive, but Near-Term Spirits Demand Soft

We plan to lower our $63 fair value estimate for wide-moat Brown-Forman by a low-single-digit percentage after absorbing weak results in the first nine months of fiscal 2024. For the period, increases of 1% in sales and 2% in operating profits missed our estimates of 3% and 5% after adjusting for acquisitions and impairments. While we acknowledge the tough comparisons from the year-ago period, which saw sales up 8% due to channel inventory restocking, we believe a softer demand for high-end spirits in the United States and Europe is also to blame, consistent with updates from peers wide-moat Diageo and wide-moat Pernod Ricard. We are trimming our 2024 sales and adjusted operating profit estimates to square with management's guidance for flat and 1% growth, respectively. That said, we think the premiumization trends in spirits and Brown-Forman’s strong brand standing remain intact, and we maintain our 10-year projection for mid-single-digit sales compound annual growth rate and mid-30s average operating margins. The 7% selloff in the share price looks overdone, and we view the stock as attractive.