The company sells its 25 branded products in 135 countries. The company’s flagship brand is Jack Daniel’s, which is the fifth-largest premium spirits brand in the world. Other brands include Finlandia Vodka, Canadian Mist, Collingwood, Early Times, Jack Daniels, Old Forester, Woodford Reserve, Korbel Champagne, Southern Comfort, Don Eduardo, el Jimador, Herradura, Pepe Lopez, Bel Arbor, Bonterra, Fetzer, Five Rivers, Jekel, Little Black Dress, Sanctuary and Sonoma-Cutrer. Brown-Forman has been focusing on international expansion for the past decade and as a result, the company now derives 55% of its revenue from outside the U.S.
The company’s strong portfolio of brands and broad geographic reach allowed it to weather the recession. The company did see a slight hiccup in sales due to a change in customer behavior with consumption switching to the home rather than in restaurant and bar settings. A roll-out of several new products and a change in promotions and marketing spending allowed the company to easily meet the shift in consumer buying habits.
As the chart below shows, Brown-Forman has seen earnings per share and free cash flow per share march steadily upwards over the past decade.
The company’s strong brand and focus on premium products has allowed it to earn above-average returns on capital and returns on assets. Both measures have improved markedly over the past several years and now stand at multi-decade highs, with return on assets approaching 18% and return on capital at 24%.
Margins have also been remarkably steady over the past decade, with gross margins hovering in the 48% to 52% range and operating margins increasing to almost 25%.
Brown-Forman continues to see growth, with international sales up 8% and domestic sales up 7%. These figures represent an improvement over fiscal 2011’s growth rate of 4%. Brown-Forman also saw operating income increase 7% compared to 6% in fiscal 2011.
Management commented that it is seeing growth that is broad based geographically. Germany, Brazil and Russia are showing strong growth. Emerging markets are showing the strongest growth with most posting double-digit increases. In contrast, growth in Poland, Australia and Spain has declined.
Jack Daniel’s Brown-Forman’s flagship brand has been leading the way. The brand returned to growth in the US thanks to the introduction of Jack Daniel’s Tennessee Honey. International growth for the brand continued its strong showing.
Brown-Forman also saw growth for its Chamford, Herradura, Sonoma-Cutrer and Woodford Reserve brands but saw declines for Southern Comfort, Korbel and el Jimador.
Much like its premium brands (or perhaps because of), Brown-Forman is priced fairly high. The company currently trades at the higher end of its historical valuation range.
Brown-Forman currently trades at a P/E of 18.6, P/Cash Flow of 17.8, and has a dividend yield of 1.9% (with a 35% payout ratio). This looks like a fair price for a company that has produced steady if unspectacular growth over many decades and any upside potential is likely limited with prices at these levels.
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Disclosure: Strubel Investment Management and/or its clients are long BF.B. Mr. Strubel is a Jack Daniel’s drinker.