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3 Reasons to Hold Brown-Forman (BF.B) Despite Cost Inflation

Zacks Equity Research
·6-min read

Brown-Forman Corporation (BF.B) appears to be a lucrative pick with solid growth prospects. The company has been in investors’ good books thanks to robust strength in its brands, growth across markets and strong consumer demand. The company’s efforts to diversify its brand portfolio to stay ahead of the curve bode well. However, it has been witnessing rising inflationary and supply-chain issues. Higher SG&A and advertising costs remain concerns.

The company boasts a robust earnings surprise trend, which continued in first-quarter fiscal 2023. Both top and bottom lines beat the Zacks Consensus Estimate and rose year over year in the fiscal first quarter. This marked the third straight quarter of top and bottom-line beat. The company gained from the increased demand for its brands, mainly Jack Daniel’s Tennessee Whiskey, and growth across all regions and the Travel Retail channel.

Backed by the robust surprise trend, the stock has outperformed the industry and the sector year to date. Although BF.B lost 2.2%, it fared better than the industry’s decline of 4.1% and the sector’s decline of 5.7%. The stock also compares favorably with the S&P 500’s decline of 14.5% in the same period.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Factors Driving Growth

Business Momentum

Brown-Forman is anticipated to retain its strong business momentum on continued portfolio strength and growth across all geographic regions. The company’s first-quarter fiscal 2023 results benefited from strength in Jack Daniel’s Tennessee Whiskey and tequila categories along with growth in the Travel Retail channel. Further, growth in the United States continues to be driven by volume gains in Woodford Reserve, Jack Daniel’s Tennessee Honey and Jack Daniel’s Tennessee Fire.

The developed international markets have been benefiting from continued recovery in the on-trade channel and the revival of travel and tourism, while the emerging markets continue to reflect the growth of Jack Daniel’s Tennessee Whiskey in Sub-Saharan Africa, Brazil and Chile, as well as New Mix in Mexico. Further, the Travel Retail channel has been gaining from the continued rebound in travel trends.

Investment in Brands

Brown-Forman is focused on investing in the diversification of its brand portfolio to drive growth. For more than a decade,  Jack Daniel's Tennessee Whiskey has been the key contributor to growth in the United States. The company’s investments in brands center around broadening the Jack Daniel’s family of brands, while also exiting the weaker brands and expanding the fast-growing premium spirits category. The company is investing toward organically accelerating the growth of two fast-growing spirits categories, bourbon and tequila. The balanced portfolio investments are supporting the company’s track record of consistent growth.

In first-quarter fiscal 2023, sales for the Jack Daniel’s family of brands benefited from the continued consumer interest in flavor, which boosted the performance of Jack Daniel’s Tennessee Honey, Jack Daniel’s RTDs, and Jack Daniel’s Tennessee Fire. Innovation contributed to sales growth through the launch of Jack Daniel’s Bonded series. Premium bourbon brands, including Woodford Reserve and Old Forester, were  supported by higher volume in the United States.

Sustainable Shareholder Returns

Brown-Forman traditionally returns excess cash to shareholders through regular dividend payouts and share repurchases. The company returned nearly $90 million to its shareholders via dividends in first-quarter fiscal 2022. BF.B declared a quarterly cash dividend of 18.85 cents per share on Class A and B common stock. The dividend will be paid out on Oct 3, 2022, to shareholders on record as of Sep 6. The company has a dividend payout ratio of 40.6%, annualized dividend yield of 1.1% and a free cash flow yield of 47.4%. The annual free cash flow return on investment of 15.8%, ahead of the industry’s 12.9%, indicates that the company’s dividend payment is sustainable.

Wrapping Up

Given the aforementioned strengths, Brown-Forman looks well-placed despite the odds of inflationary input costs, supply-chain issues and higher SG&A and advertising costs. The company is likely to retain momentum in the long term backed by focus on brands and cost management. The removal of the EU and the U.K. tariffs on American whiskey also remains a boon for the company.

The Zacks Consensus Estimate for BF.B’s fiscal 2023 sales and earnings suggests growth of 2.2% and 12.6%, respectively. It has a trailing four-quarter earnings surprise of 10.2%.

Stocks to Consider

We have highlighted some better-ranked stocks from the broader Consumer Staples space, namely Constellation Brands Inc. STZ, PepsiCo Inc. PEP and Fomento Economico Mexicano FMX.

Constellation Brands produces and market beer, wine and spirits. It currently has a Zacks Rank #2 (Buy). Shares of STZ have lost 4.4% in the year-to-date period. The company has an expected EPS growth rate of 10.8% for three-five years.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Constellation Brands’ current financial-year sales and earnings suggests growth of 7.6% and 7.2%, respectively, from the year-ago period’s reported figures. STZ has a trailing four-quarter earnings surprise of 4.4%, on average.

PepsiCo is one of the leading global food and beverage companies. It currently has a Zacks Rank #2. The company has an expected EPS growth rate of 7.7% for three to five years. Shares of PEP have declined 3.6% year to  date.

The Zacks Consensus Estimate for PepsiCo’s current financial-year sales and earnings suggests growth of 5.6% and 6.4%, respectively, from the year-ago period’s reported figures. PEP has a trailing four-quarter earnings surprise of 3.8%, on average.

Fomento Economico Mexicano, alias FEMSA, has exposure to various industries, including beverage, beer and retail, which gives it an edge over its competitors. It currently has a Zacks Rank #2. FMX has a trailing four-quarter earnings surprise of 18.9%, on average. Shares of FMX have lost 14.9% year to date.

The Zacks Consensus Estimate for FEMSA’s current financial-year sales suggests growth of 11.3% from the year-ago period's reported figures. FMX has an expected EPS growth rate of 11.4% for three-five years.


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BrownForman Corporation (BF.B) : Free Stock Analysis Report
 
Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report
 
PepsiCo, Inc. (PEP) : Free Stock Analysis Report
 
Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
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Zacks Investment Research