Brown-Forman Pinned to Neutral - Analyst Blog
March 27 2013 - 11:40AM
Zacks
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, with a target price of $72.00. Moreover, the company
holds a Zacks Rank #3 (Hold).
Why Reiterate?
We remain impressed with the company’s positive earnings
surprise trend, strong organic revenue growth and impressive
management guidance. However, on the other hand, intense
competition from private players and rising commodity costs make us
cautious on the stock.
The third quarter fiscal 2013 earnings of 73 cents per share at
Brown-Forman exhibited an improvement of 18% from the comparable
year-ago quarter as well as the Zacks Consensus Estimate of 70
cents. The year-over-year increase was primarily driven strong
top-line growth along with improved margins.
Looking at the earnings surprise history, the company has
surpassed the Zacks Consensus Estimates thrice in the trailing four
quarters. The average positive surprise in the trailing 4 quarters
comes to 3.6%.
Brown-Forman now projects fiscal 2013 earnings between $2.60 and
$2.68 per share. The current Zacks Consensus Estimate stands at
$2.68 per share, which is in line with the upper end of company’s
guidance range.
Moreover, Brown-Forman continues to expect operating income in
the low-double-digits range, while underlying sales are expected to
increase in the high-single-digit range.
Apart from the strong third-quarter results, Brown-Forman’s
growth story looks compelling. We believe that the company’s
sustained focus on pricing, product innovation and expanding
operations in the emerging markets will likely boost operational
performance.
On the flip side, stiff competition from other alcoholic
beverage companies, such as Diageo plc (DEO) along
with potential risk of operating in overseas market may have an
adverse effect on Brown-Forman’s operations. Moreover, we believe
that the shares of the company are richly valued at the current
juncture, which limits its upside potential. Brown-Forman currently
trades at a forward P/E of 25.83x, substantially premium from the
peer group average of 20.28x.
Further, distilled spirits are subject to excise tax in various
countries. Rising fiscal pressure in the U.S., Europe and
many emerging markets may increase the risk of a potential rise in
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.
Other Stocks Worth Considering
Other stocks worth considering in the alcoholic beverage
industry are Companhia de Bebidas Das Americas aka
AMBEV (ABV) and Molson Coors Brewing
Company (TAP). Both the companies carry a Zacks Rank #2
(Buy).
AMBEV-PR ADR (ABV): Free Stock Analysis Report
BROWN FORMAN B (BF.B): Free Stock Analysis Report
DIAGEO PLC-ADR (DEO): Free Stock Analysis Report
MOLSON COORS-B (TAP): Free Stock Analysis Report
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