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Brown Forman: Conference Notes

September 19, 2011 | About:
The Science of Hitting

The Science of Hitting

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Brown-Forman (BF.A)(BF.B), the company behind alcoholic beverage brands such as Jack Daniel’s, Gentleman’s Jack, and (my personal favorite) Southern Comfort, presented to investors at the Barclay’s Back to School Conference two weeks ago. I wrote an article last week about Diageo’s (DEO) presentation at the conference, and thought I would expand upon some other players in the category by doing a write up on Brown-Forman.

Since 2002, the company has increased net sales, diluted earnings per share, and dividends at a compounded annual growth rate of 8.62%, 13.58% and 17.13%, respectively (dividend payout ratio was increased from 41.4% to 57% over that time period). Here are some of the highlights from the presentation, starting with the prepared remarks from Executive Vice President and CFO John Berg:

Mr. Berg started by noting the company’s stellar long-term performance (as of April 30, 2011), with 10% EPS growth and 13% total shareholder return per annum over the past 20 years, compared to 9% annually for the S&P 500.

Over the past decade, Brown-Forman has transformed itself from a domestic player to a global company. In 2001, more than three-quarters of the company’s sales were coming from the U.S.; in 2011, international sales accounted for more than half (55%) of the company’s annual revenue (compared to 53% in 2010). On a domestic versus emerging view, the regions have grown at an impressive 6% and 20% per annum, respectively.

This diversification is also evident in the country-specific geographic breakdown, which shows that international growth isn’t being driven by one or two markets. Over the past decade, the company’s top 10 countries (by sales) have grown at a CAGR of 7%, while the remainder that round out the top 25 have grown at 14% per annum, showing that they have accounted for a larger portion of the company’s (relative) growth, and will be the main drivers of absolute sales growth if trends continue as such.

Despite their expansion in the past decade, the company is still a relatively small player in the global spirits picture, with 5% share in the U.S., UK and Mexico, and practically 0% market share in the BRIC countries. As always, this is a double edged sword: While the company has plenty of opportunity to grow in some of these regions, they also face a fierce competitor looking to defend share positions in companies like Diageo and Pernod Ricard.

One of the company’s more recent innovations that may be particularly well-known to U.S. consumers is Jack Daniel’s Tennessee Honey. As Mr. Berg noted, “What you find is, generally speaking, people all over the country know Jack Daniel’s very well, love the brand, but in some cases you find that the product just isn’t right for some people. What we found is that the introduction of honey has really made it easier for people who love the franchise to actually participate in it; and so what we’ve seen is the expansion of our consumer base as well an expansion of consumer occasions.”

While this is the most notable introduction, this is not the company’s first foray into the flavored whiskey (particularly honey) area. The company first entered the space with the launch of Wild Turkey American Honey in 2007, which hit nearly 200,000 9L cases in 2010.

In 2009, the company followed up the Wild Turkey launch with Beam Red Stag and Evan Williams Honey, all of which collectively reached more than 400,000 cases in 2010. “It appears to us that flavors seem to be coming to the whiskey category and so we naturally got interested.”

It should be interesting to see whether Brown Forman can follow up with the success of these three smaller brands with what they see as a “huge opportunity” for Jack Daniel’s Tennessee Honey; through the three months ending August 2011, things are looking quite good — Tennessee Honey outsold the other three brands combined, with roughly 25,000 cases.

While not as diversified as someone like Diageo, Brown-Forman holds a strong bargaining chip behind the brand equity of Jack Daniels; the stock was down 3% in Monday’s trading session, and currently has a market cap just shy of $10 billion.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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Comments

The Science of Hitting
The Science of Hitting premium member - 2 years ago
Correction: While I actually wrote John, I meant to write "Don Burg".

Also, Brown Forman does NOT own the three brands I mentioned above (Wild Turkey, Red Stag or Heaven Hill Honey); I misunderstood Mr. Burg, who was pointing out that flavors in the category had been successful, which led to the launch of the Jack Daniel's variety.

Finally, the dividend payout ratios I noted above are misleading due to a special dividend at the end of 2010; in reality, the payout ratio is closer to 39% when adjusted.

I apologize for these careless errors.

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