Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon

Business Strategy & Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that is particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is believed Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. The developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory.

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in non discretionary spending categories. Nevertheless, it is expected that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strengths

Brown-Forman is in solid financial health, and from the vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and there’s no transformative transactions on the horizon. The stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $899 million in balance sheet cash as of the end of the first quarter of 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million.

Bulls Say

Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins.
Flavored line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers.
COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Description

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable non whiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family.

(Source: Morningstar)

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