Wednesday, 27 August 2014

Brown-Forman: Branded products, Firm price

I have looked at Brown-Forman a couple of times before, concluding back in June that:

'I am all for growth businesses but with extra oomph being given by the Jim Beam takeout the share does not excite me at the moment...especially when I can buy broad peers like Remy Cointreau or Pernod Ricard at a discount (to neutral cycle earnings) and also with good brands'

Of course a high valuation can be indicative of success and looking through the recent Brown-Forman annual meeting presentation this was very apparent:

The shares have though come off their June high although in proportional terms it is pretty immaterial: that's still some performance over the last year.  

And you can see why with the brands shown above and, in another slide from their annual meeting presentation, it has ticked the quantitative boxes too:

So how about the numbers today? The comment which caught my attention was this one:

'The geopolitical environment remains fragile, particularly in Russia, where iconic American brands are experiencing increased scrutiny, including some of Brown-Forman's brands'

No surprises there.  Headline Q1 numbers came out at 5-7% growth (good general emerging market and super premium growth but countering this some inventory absorption/tough comparisons in the US) but for the full year the company remains sanguine:

'We anticipate higher rates of sales growth over the balance of the year, led by Jack Daniel’s and our portfolio of premium whiskey brands. We reaffirm our full-year guidance and our expectations of 9-11% underlying operating income growth in fiscal 2015'

At a near x20 EV/ebit valuation Brown-Forman remains in the 'structural growth' camp.  As noted above branded businesses have been taken out (Jim Beam) at eye-popping levels.  Despite the company undertaking the buybacks (relatively modest) at an average price of just over US$90 the share is going to have to be sub US$80 before I have a look at it again.

It is not a short though...I worry too much about a well-financed buyer of branded businesses 'doing a Jim Beam'.

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