We have maintained our long-term Neutral recommendation on Brown-Forman Corporation (BF.B), with a target price of $75.00.
Why Reiterate?
Brown-Forman is one of the leading producers and distributors of premium alcoholic beverages in the world and commands a strong portfolio of globally-recognized brands. The company’s portfolio consists of more than 25 premium brands, including Jack Daniel’s –the flagship spirits brand – followed by Southern Comfort liqueur, Canadian Mist whiskey, Finlandia vodka as well as Fetzer and Korbel wine brands.
We remain impressed with the company’s strong organic revenue growth and management guidance. We believe that Brown-Forman’s consistent focus on developing its premium Jack Daniel’s brand through innovation and packaging changes has paid off, making it a thriving company.
Apart from expanding the market share of its flagship Jack Daniel’s in developed and emerging markets, the company seeks to expand the sphere of other brands, such as Gentleman Jack, Jack Daniel's Single Barrel and Jack Daniel's ready-to-drink within the Jack Daniel’s brand.
Moreover, we expect the company’s pricing strategy, product innovation, and penetration into emerging markets to boost operational performance and bolster its well-established position in the market.
However, disappointing fiscal first-quarter 2014 earnings results on the back of higher input costs and increase in operating expenses have hurt investor sentiments. On a positive note, however, the company reaffirmed its fiscal-2014 outlook, still projecting earnings in the range of $2.80–$3.00 per share, a 9%–11% increase in operating income and a high-single-digit rise in sales.
Other impediments for the stock include stiff competition from other alcoholic beverage companies, such as Diageo plc (DEO) along with the potential risk of operating in overseas market may have an adverse effect on Brown-Forman’s financial performance. Moreover, we caution that any increase in excise tax may adversely affect the company’s financial performance as distilled spirits are subject to excise tax in various countries.
Other Stocks Worth Considering
Brown-Forman holds a Zacks Rank #4 (Sell). Stocks worth considering in the alcoholic beverage industry are Boston Beer Co. Inc. (SAM) and Constellation Brands Inc. (STZ). Boston Beer holds a Zacks Rank #1 (Strong Buy) while Constellation Brands has a Zacks Rank #2 (Buy).
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