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Why Spirits Have Brown-Forman Investors Feeling Warm and Fuzzy

Nicholas Rossolillo, The Motley Fool

As the economy grows, consumers increasingly favor more expensive and complex drinks -- or so the thinking goes. In the decade since the financial crisis of 2008, drinking habits have reflected such behavior. Craft beer has been a big winner. So have distilled alcoholic products, and leading whiskey maker Brown-Forman (NYSE: BF-A)(NYSE: BF-B) is a prime example that the higher-proof goods are still trending.

Various glasses of alcohol sitting on a bar top.

Image source: Getty Images.

Rounding out the fiscal year

North America has had an explosion of innovation and variety when it comes to food and drink. In the driver's seat is a consumer willing to spring for quality and uniqueness above all else. Brown-Forman -- which owns a stable of brands like Jack Daniel's whiskey and Herradura and El Jimador tequila, among others -- has made hay by introducing super-premium products and new takes on distilled classics.

The company's recently completed 2019 fiscal year demonstrates that. Despite tariff headwinds from the U.S.-China trade war (which weighed on sales and profits coming from the emerging-markets segment), Brown-Forman put up respectable numbers across the board. The sale of premium bourbons led the charge, rising 19% over the prior year (23% when excluding currency exchange effects). As a result, the stock is up 18% year to date. 

Metric

12 Months Ended April 30, 2019

12 Months Ended April 30, 2018

YOY Increase

Revenue

$3.32 billion

$3.25 billion

2%

Operating income

$1.14 billion

$1.05 billion

9%

Earnings per share

$1.73

$1.48

17%

YOY = year over year. Data source: Brown-Forman.

Always on the lookout for other brands to add to the fold, Brown-Forman recently purchased Fords Gin to add to its premium portfolio. Combined with momentum in its other high-end offerings, the company expects another solid performance in its new fiscal year.

When will this barrel run dry?

Brown-Forman CEO Lawson Whiting spoke about two major trends that could support growth for years to come. First is the aforementioned change in consumer tastes. Whiting had this to say on the last earnings call:

I am frequently asked about the sustainability of the bourbon boom in general and the supply outlook, and believe me, it's something we study closely as our perspective has implications on our long-term corporate strategies. But in short, we believe this bourbon renaissance is just getting started and the historical cycles really would support this viewpoint. Younger consumers are increasingly focused on brands with provenance and with authenticity and they're searching for quality over quantity. With our premium spirits portfolio intentionally focused on American whiskey, we believe we're one of the best-positioned companies in the consumer staples universe to continue to deliver sustained compounding growth in sales. 

In other words, young people are transforming the marketplace for alcohol -- and those drinkers are interested in high quality and knowing the source of what they're purchasing (i.e., not mass-produced in a factory). Whiting also spoke about his company's potential overseas -- 52% of sales in the past year came from the U.S. and Mexico. Many emerging markets accounted for a single-digit share of total revenue but were growing well into the double digits. For example, Poland, Russia, and Brazil combined only made up 6% of sales in 2019, but underlying sales were up 10%, 17%, and 25%, respectively, compared with a year ago. Whiting sees that emerging-market interest in American whiskey continuing.

Tariffs and a strong U.S. dollar will remain an issue for this maker of spirits in the year ahead. Five percent to 7% underlying growth is expected, which should equate to earnings of $1.75 to $1.85 -- a mere 4% increase at the midpoint of guidance. A resolution to trade disputes can't come soon enough for Brown-Forman. Shares trade at 31 times forward earnings; that's a little pricey for my personal taste, but that could change should some geopolitical headwinds get resolved. I'm keeping an eye on this stock.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.