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Brown-Forman Corp Class B BF.B

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Morningstar’s Analysis

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Uncertainty Abounds as Brown-Forman Heads Into 2021; Risks Not Reflected in Frothy Valuation

Nicholas Johnson Equity Analyst

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.

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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, 2020
Fiscal Year End Apr 30, 2021
Stock Type Slow Growth
Employees 4,800