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.