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Brown-Forman Trying Hard to Overcome Hurdles: Here's How

Zacks Equity Research

Brown-Forman Corporation BF.B seems troubled, as the company has been battling currency woes for a while now along with tough economic conditions in emerging markets. Nevertheless, the company is trying all means to put itself back on the growth trajectory. Let’s take a closer look at the stock’s inside story.

What’s Hurting the Stock?

The company has underperformed the Zacks categorized Beverages – Alcoholic industry in the last one year. Evidently, Brown – Forman’s shares have dropped 2.8% over the past one year, compared with the industry’s gain of 1.5%. Further, the company has lost 4.4%, since it released third-quarter fiscal 2017 results.

The company posted adjusted earnings of 47 cents a share that rose 1% year over year but lagged the Zacks Consensus Estimate by a penny. The company’s top line was almost flat with the year-ago quarter at $808 million but came ahead of our estimate of $796.1 million. Net sales were hurt by the persistence of currency headwinds, tough economic conditions in emerging markets and the divestiture of Southern Comfort and Tuaca in fiscal 2016.

Management anticipates the perils of currency woes and unstable emerging market conditions along with an uncertain geopolitical environment to linger in fiscal 2017. This also caused the company to issue a tepid outlook for fiscal 2017.

Management now projects underlying sales growth (excluding negative currency impact and other adjustments) in the range of 3–4% for fiscal 2017, compared with the previous forecast of 4–5% increase. Moreover, the company now estimates earnings per share in the band of $1.71–$1.76 compared with $1.71–$1.81 guided previously.

Following the drab outlook, the Zacks Consensus Estimate of $1.73 and $1.87 for fiscal 2017 and fiscal 2018 has declined 2 cents and 1 cent, respectively, over the past 30 days.

Revival Efforts on Track

Brown-Forman commands a robust portfolio of globally recognized brands and is a major producer and distributor of premium alcoholic beverages in the world. We expect the company’s continued focus on pricing, product innovation and expanding operations in emerging markets to improve its operational performance, and further strengthen its market position. Additionally, this Zacks Rank #3 (Hold) company has been taking initiatives to drive overall growth that include expansion of its operations, alongside boosting its shareholders’ value.

We also appreciate  Brown-Forman’s efforts to expand Jack Daniel's share in the developed markets, such as France and the U.S., as well as in emerging markets, where the whiskey category is in the early stages of development. Also, the company is on track to expand the sphere of its other brands. Moving forward, the company expects to grow on the back of strong demand for its authentic American whiskey brands worldwide, consumer interest in flavored whiskey and a growing trend in premium spirits.

Furthermore, the company is looking toward entering the fastest-growing spirit category, the Irish Whiskey, with the purchase of all the shares of Slane Castle Irish Whiskey Limited in Ireland. In another development, the company also acquired two historic properties at West Main Street in Louisville, KY, in order to boost its Old Forester brand. Additionally, as part of its portfolio management, the company concluded the sale of its Southern Comfort and Tuaca trademarks.

We believe that these robust growth endeavors should provide some cushion and help this alcoholic beverage company to counter the aforementioned challenges.

Key Picks

Better-ranked stocks in the same industry include Ambev S.A. ABEV, Castle Brands Inc. ROX and Compañía Cervecerías Unidas S.A. CCU, each carrying  a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ambev S.A., with a long-term earnings growth rate of 7.2% has increased 11% in the past one year.

Castle Brands has surged nearly 37.8% in the past one year.

Compañía Cervecerías Unidas has jumped 17.8% in the past six months.

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