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Brown-Forman Still at Neutral Lane

Zacks Equity Research

We have maintained our long-term ‘Neutral’ recommendation on Brown-Forman Corporation (BF.B), one of the leading producers and distributors of premium alcoholic beverages in the world. Our recommendation is based on the fact that amidst tough economic backdrop, the company posted better-than-expected first-quarter 2013 bottom-line result.

Brown-Forman’s quarterly earnings of 69 cents per share surged 27.8% year over year, and exceeded the Zacks Consensus Estimate of 62 cents on the back of top-line growth along with lower input costs. Net sales grew 4% during the quarter as well.

Brown-Forman expects solid improvement in customer trends in the remaining period of fiscal 2013. Moreover, based on high-single digit growth expectation in net sales and operating income, the company anticipates fiscal 2013 earnings in the range of $2.40–$2.67 per share.

The global spirit industry is trading well and we expect the momentum to continue in near future. Further, we anticipate the company’s continued focus on pricing, product innovation, and expanding operations in emerging markets will boost its operational performance.

Moreover, we believe Brown-Forman’s decision to move its Japan distribution facility from Suntory to Asahi will improve its market share. The region has a benefit of less competition with privately-owned spirit brands, which will give enough scope to the company for brand building.

The company has a consistent track record of returning cash to shareholders in the form of share repurchase and dividend payment. Brown-Forman has paid quarterly cash dividends consecutively for the past 65 years while increasing the same for the last 28 years. Moreover, the company’s recent 3-for-2 stock split reflects its commitment to enhance long-term value for shareholders. Brown-Forman also portrays its confidence to boost longer-term prospects for earnings as well as cash flows.

However, stiff competition from other players such as Diageo plc (DEO) and SABMiller plc (SBMRY) along with potential risk of operating in overseas market may have an adverse effect on Brown-Forman’s financial performance. Moreover, we believe the shares of the company are richly valued at the current juncture, which keeps us on the sidelines.

Distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may increase the risk of a potential excise tax on spirits by governments of respective countries. A hike in excise tax in the future may have an adverse effect on Brown-Forman’s financial performance.

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