Sunday, November 16, 2008

Brown-Forman Q12009

Brown-Forman posted a decline of 5% in YOY EPS for the first quarter of 2009. However, this decline in earnings was due to 25% of their Agave plants (used for making tequila) dying unexpectedly. While the company stated that it was not uncommon for a portion of the Agave stock to be unusable this high of a loss was very uncommon and should be a onetime event. Excluding this onetime charge the fundamentals of the company remained strong, as they experienced a 12% increase in EPS (excluding the $22M non cash charge) accompanied by a 7% increase in net sales. The majority of the company’s current growth is coming from less developed markets such as Eastern Europe, Latin America and Southeast Asia as growth in many developed markets has declined due to the current economic conditions. The company has maintained its FY2009 guidance expecting 1%-8% growth in EPS for the year including the onetime non cash charge.

Moving forward much of the company’s growth is expected to come from areas outside the US and its main drivers are expected to be its Jack Daniels and Finlandia brands and from its 2007 acquisition of Case Herradura. The company has developed new harvesting strategies to become more efficient and prevent further losses such as the one due to Agave, and should stand to benefit from the current decline in commodity costs especially in fuel and grain. On a valuation basis the company is trading significantly below its historical average in PE, EV/EBITDA, P/S, P/B and P/CF.

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