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Brown-Forman Corp BF.B

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Morningstar’s Analysis

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Solid Q4 at Brown-Forman; Momentum Into Fiscal-Year 2022, but Market Wants More; Shares Expensive

Analyst Note

| Nicholas Johnson, CFA |

With wide-moat Brown-Forman’s stock near 52-week highs heading into its fiscal fourth-quarter earnings print, reflecting an improving macroeconomic backdrop globally, we believe investors were eager to glean any visibility into demand dynamics (particularly in on-premises channels) and management’s ability to preserve margins. The results were mixed (bottom-line miss and top-line beat relative to FactSet consensus), and the post-report mid-single-digit swoon in shares helps elucidate, we believe, the reality that the firm--along with many of its distillation peers--is being held in unduly high esteem by the market. We plan to raise our $68 fair value estimate by a mid-single-digit clip, reflecting time value as we roll our model and accelerated sales momentum heading into fiscal 2022, partially offset by higher taxes as we incorporate Morningstar’s probability-weighted house view of an increase in the U.S. federal tax rate to 26%. Nevertheless, we don’t see any margin of safety in the stock. The firm’s valuation has consistently been out of touch with its fundamentals, in our view, and even as the current selling pressure is making the dissonance less stark, we’d still recommend prospective investors remain on the sidelines.

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Company Profile

Business Description

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver at over 75% of revenue, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable nonwhiskey offerings include vodkas such as Finlandia and tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S., but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family.

850 Dixie Highway
Louisville, KY, 40210
T +1 502 585-1100
Sector Consumer Defensive
Industry Beverages - Wineries & Distilleries
Most Recent Earnings Apr 30, 2021
Fiscal Year End Apr 30, 2021
Stock Type Classic Growth
Employees 4,700


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