Unveiling Brown-Forman (BF.B)'s Value: Is It Really Priced Right? A Comprehensive Guide
With a daily loss of -2.83% and a 3-month loss of -14.15%, Brown-Forman Corp (NYSE:BF.B) has seen some turbulence in the market. Despite this, the company maintains an Earnings Per Share (EPS) of 1.59. The question that arises then is, is the stock modestly undervalued? This article aims to explore the valuation analysis of Brown-Forman, providing the reader with a comprehensive understanding of its market value.
Introducing Brown-Forman Corp (NYSE:BF.B)
Based in the U.S., Brown-Forman is a premium distilled spirits manufacturer, generating approximately 70% of its revenues from the whiskey category. The company's portfolio includes renowned brands like Jack Daniel's, Woodford Reserve, and Old Forester. Brown-Forman also manufactures and distributes tequila, vodka, rum, gin, and premium wines. With 47% of sales from its home market, the company has a strong international presence, particularly in Europe, Australia, and Latin America. The Brown family controls over 50% of the economic interests and voting power of the company.
When comparing the stock price with the GF Value, an estimation of fair value, Brown-Forman's current price of $56.64 per share seems modestly undervalued. With a market cap of $27.40 billion, the company's value warrants a deeper analysis.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally trade at.
If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, it is undervalued, and its future return will likely be higher. Brown-Forman's stock shows every sign of being modestly undervalued. As a result, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Brown-Forman has a cash-to-debt ratio of 0.14, ranking worse than 72.91% of 203 companies in the Beverages - Alcoholic industry. Based on this, GuruFocus ranks Brown-Forman's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Brown-Forman has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.30 billion and Earnings Per Share (EPS) of $1.59. Its operating margin is 26.09%, ranking better than 87.26% of 212 companies in the Beverages - Alcoholic industry. Overall, the profitability of Brown-Forman is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. Brown-Forman's 3-year average revenue growth rate is better than 59.18% of 196 companies in the Beverages - Alcoholic industry. However, its 3-year average EBITDA growth rate is 0.6%, ranking worse than 66.48% of 179 companies in the same industry. This growth rate indicates a need for improvement.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Brown-Forman's return on invested capital is 14.54, and its cost of capital is 7.92.
Conclusion
In conclusion, the stock of Brown-Forman (NYSE:BF.B) shows every sign of being modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 66.48% of 179 companies in the Beverages - Alcoholic industry. To learn more about Brown-Forman stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
