Analyst Note
| Nicholas Johnson |Wide-moat Brown-Forman’s lofty trading multiples leading into its fourth-quarter earnings release seemed to belie the precarious backdrop of the coronavirus. Given the dissonance between valuation and the macro environment, we believe investors wanted insight into the full extent of the firm’s direct (on-premises and travel retail) exposure to containment and the measures being taken to preserve margins. The results were mixed, with sales ahead and profits behind CapIQ consensus, but in general, management commentary struck us as constructive. The business should be slightly more resilient than we anticipated (for example, its 20% on-premises exposure was lower than we expected), and this likely explains the positive movement in the shares after the release. We expect our fair value estimate to increase to $60 from $58, as time value benefits more than offset expectations for a weaker fiscal 2021. Nevertheless, we believe there are many risks not reflected in the current market price and view the stock as overvalued.