BF.B Stock Study (7-11-24)

Posted by Mark on August 28, 2024 at 06:30 | Last modified: July 11, 2024 11:03

I recently did a stock study on Brown-Forman Corp (BF.B) with a closing price of $42.66.

M* writes:

     > Brown-Forman is a US-based manufacturer of premium distilled
     > spirits that generates close to 70% of revenues in the whiskey
     > category, under well-known Tennessee whiskey brand Jack Daniel’s
     > and bourbon brands Woodford Reserve and Old Forester. It also
     > manufactures and distributes tequila, vodka, rum, gin, and premium
     > wines. The company generates 45% of sales from its home market,
     > while the bulk of international revenues come from Europe,
     > Australia, and Latin America. The Brown family controls over 50%
     > of the economic interests and a 67% voting power of the company.

Over the past 10 years (FY ends Apr 30; references to year at BI and Value Line incremented to align), this medium-size company has grown sales and EPS at annualized rates of 3.9% and 4.8%, respectively (’16 EPS, up 63.3% YOY, excluded due to one-time sale of Southern Comfort and Tuaca brands). Lines are weakly up and parallel with sales dips in ’16, ’17, and ’24 along with EPS dips in ’20, ’22, and ’23. Value Line gives an Earnings Predictability score of 95.

Over the past decade, PTPM trails peer and industry averages while ranging from 24.1% in ’23 to 32.0% in ’15 (48.2% in ’16 excluded) with a last-5-year mean of 28.9%. ROE leads peer and industry averages, ranging from 25.7% in ’23 to 59.3% in ’18 (72.8% in ’16 excluded) with a last-5-year mean of 33.5%. Debt-to-Capital is less than peer and industry averages despite increasing from 38.4% (’15) to 46.8% (’24) with a last-5-year mean of 49.0%.

Quick Ratio is 0.8 and Interest Coverage is 11.2 (21.1) per M* (Value Line). M* rates the company “Exemplary” for Capital Allocation and assigns a “Wide” Economic Moat. Value Line grades the company A for Financial Strength.

With regard to sales growth:

• YF projects YOY 1.1% and 4.7% for ’25 and ’26, respectively (based on 16 analysts).
• Zacks projects YOY 0.8% and 5.1% for ’25 and ’26, respectively (5 analysts).
• Value Line projects 2.8% annualized growth from ’24-’29.
• CFRA projects 2.8% YOY and 4.2% per year for ’25 and ’24-’26, respectively.
• M* provides 2-year annualized ACE of 3.1% and projects 5.6% per year for the next decade in its analyst note.

I am forecasting near the bottom of the range at 1.0% per year.

With regard to EPS growth:

• MarketWatch projects 0.8% and 3.9% per year for ’24-’26 and ’24-’27, respectively (based on 19 analysts).
• Nasdaq.com projects 5.9% YOY and 6.5% per year for ’26 and ’25-’27 (8, 5, and 2 analysts for ’25, ’26, and ’27).
• Seeking Alpha projects 4-year annualized contraction of 1.3%.
• YF projects YOY 13.6% contraction for ’25, 8.1% growth for ’26, and 5-year annualized contraction of 1.2% (17).
• Zacks projects YOY 13.6% contraction for ’25 and 5.6% growth for ’26 (5).
• Value Line projects 14.7% annualized growth from ’24-’29.
• CFRA projects 8.9% YOY contraction for ’25 and 0.5% growth per year for ’24-’26 along with 3-year CAGR of 4.0%.
• M* projects long-term annualized growth of 5.1%.

My 1.0% forecast is near bottom of the long-term-estimate range (mean of four: 4.3%). I will use ’24 EPS of $2.14/share as the initial value.

My Forecast High P/E is 30.0. Over the past decade, high P/E ranges from 21.3 in ’16 to 47.9 in ’23 with a last-5-year mean of 43.0 and a last-5-year-mean average P/E of 36.8. I am near bottom of the range (only ’16 is less).

My Forecast Low P/E is 16.0. Over the past decade, low P/E ranges from 17.2 in ’16 to 37.0 in ’23 with a last-5-year mean of 30.6. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is the default $34.20 given initial value above. This is 19.8% less than the previous closing price and 17.4% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 25.1% in ’16 to 48.3% in ’23 with a last-5-year mean of 41.5%. I am forecasting below the range at 25.0%.

These inputs land BF.B in the HOLD zone with a U/D ratio of 2.9. Total Annualized Return (TAR) is 10.4%.

PAR (using Forecast Average—not High—P/E) of 5.0% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 6 studies in the past 90 days (my study and 2 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 3.8%, 8.1%, 38.2, 26.7, and 40.8%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 20.0 that is less than MS (32.5) and less than mine (23.0).

MS high / low EPS are $2.85 / $1.96 versus my $2.25 / $2.14 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $4.25 soars above both.

MS LSPF of $41.90 implies a Forecast Low P/E of 21.4: less than the above-stated 26.7. MS LSPF is 19.9% less than the default $1.96/share * 26.7 = $52.33 (INVALID on today’s date) resulting in more conservative zoning. MS LSPF is 22.5% greater than mine, however.

With regard to valuation, PEG is 19.7 per my projected P/E: NMF due to my 1.0 denominator (growth rate). Relative Value [(current P/E) / 5-year-mean average P/E] is fire-sale low at 0.54. This may be deceiving if the stock has been enjoying elevated P/E levels over the last few years due to COVID-19.

I think MOS is robust because my inputs are near or below respective analyst/historical ranges. I can’t do much comparison with MS due to the tiny sample size but as anecdotal reference, MS TAR of 17.1% is 6.7% per year greater than mine.

Despite doing business for over 150 years, Brown-Forman is “undiscovered country” for the BI community although its brands (Jack Daniel’s, Canadian Mist, Korbel—who knew?) probably are not. It’s not a fast grower and that may be significant. However, it seems built to last with solid financial strength. Unless one thinks alcohol will be phased out in coming years (think DEO as well), it may be worth a look.

Per U/D, BF.B is a BUY under $42/share. BI TAR criterion is met < $34 given a forecast high price ~$68.

A 90-day free trial to BetterInvesting® may be secured here (also see link under “Pages” at upper right of screen).