Alcohol & Tobacco Stocks

Brown-Forman Corporation – February 2017 $BF.B

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Brown-Forman Corporation (BF.B) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Brown-Forman Corporation is a spirit and wine company. The Company manufactures, bottles, imports, exports, markets and sells a range of alcoholic beverages. The Company has a portfolio of approximately 40 spirit, wine and ready-to-drink cocktail (RTD) brands. Its principal brands include Jack Daniel’s Tennessee Whiskey, Jack Daniel’s RTDs, Jack Daniel’s Tennessee Honey, Gentleman Jack Rare Tennessee Whiskey, Jack Daniel’s Tennessee Fire, Jack Daniel’s Single Barrel Collection, Jack Daniel’s Sinatra Select, Jack Daniel’s Winter Jack, Jack Daniel’s No. 27 Gold Tennessee Whiskey, Finlandia Vodkas, Finlandia RTDs, Korbel California Brandy, Woodford Reserve Kentucky Bourbons, el Jimador Tequilas, el Jimador New Mix RTDs, Herradura Tequilas, Canadian Mist Canadian Whisky, Sonoma-Cutrer California Wines, Early Times Kentucky Whisky and Bourbon, Chambord Liqueur, Old Forester Kentucky Bourbon, Antiguo Tequila, Pepe Lopez Tequila, Santa Dose Cachaca and Collingwood Canadian Whisky.

BF.B Chart

BF.B data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of BF.B – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $17,371,465,523 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.80 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 103.33% Pass
6. Moderate PEmg Ratio PEmg < 20 23.98 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 13.79 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.80 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.18 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.88
MG Growth Estimate 7.91%
MG Value $45.80
Opinion Fairly Valued
MG Grade B
MG Value based on 3% Growth $27.30
MG Value based on 0% Growth $16.00
Market Implied Growth Rate 7.74%
Current Price $45.14
% of Intrinsic Value 98.55%

Brown-Forman Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $1.23 in 2013 to an estimated $1.88 for 2017. This level of demonstrated earnings growth supports the market’s implied estimate of 7.74% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Brown-Forman Corporation revealed the company was trading above its Graham Number of $11.33. The company pays a dividend of $0.68 per share, for a yield of 1.5% Its PEmg (price over earnings per share – ModernGraham) was 23.98, which was below the industry average of 28.57, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.31.

Brown-Forman Corporation performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$2.31
Graham Number $11.33
PEmg 23.98
Current Ratio 2.80
PB Ratio 13.79
Current Dividend $0.68
Dividend Yield 1.51%
Number of Consecutive Years of Dividend Growth 20

 

 

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Most Recent Balance Sheet Figures 

Balance Sheet Information 10/1/2016
Total Current Assets $2,530,000,000
Total Current Liabilities $904,000,000
Long-Term Debt $1,917,000,000
Total Assets $4,720,000,000
Intangible Assets $1,383,000,000
Total Liabilities $3,437,000,000
Shares Outstanding (Diluted Average) 391,848,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.71
Apr2016 $2.61
Apr2015 $1.61
Apr2014 $1.53
Apr2013 $1.38
Apr2012 $1.19
Apr2011 $1.30
Apr2010 $1.01
Apr2009 $0.96
Apr2008 $0.95
Apr2007 $0.84
Apr2006 $0.69
Apr2005 $0.67
Apr2004 $0.53
Apr2003 $0.44
Apr2002 $0.44
Apr2001 $0.45
Apr2000 $0.42
Apr1999 $0.39
Apr1998 $0.36
Apr1997 $0.33

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.88
Apr2016 $1.87
Apr2015 $1.46
Apr2014 $1.35
Apr2013 $1.23
Apr2012 $1.13
Apr2011 $1.08
Apr2010 $0.94
Apr2009 $0.88
Apr2008 $0.80
Apr2007 $0.70
Apr2006 $0.60
Apr2005 $0.54
Apr2004 $0.47
Apr2003 $0.44
Apr2002 $0.43
Apr2001 $0.41

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – November 2015
Brown-Forman Corporation Analysis – September 2015 Update $BF/B
Brown-Forman Corporation Analysis – June 2015 Update $BF.B
18 Companies in the Spotlight This Week – 3/21/15
Brown-Forman Corporation Quarterly Valuation – March 2015 $BF.B

Other ModernGraham posts about related companies

Boston Beer Company Inc Valuation – Initial Coverage $SAM
Constellation Brands Inc Valuation – August 2016 $STZ
Reynolds American Inc Valuation – July 2016 $RAI
Philip Morris International Inc Valuation – June 2016 $PM
Altria Group Inc Valuation – June 2016 $MO
Constellation Brands Inc Valuation – January 2016 Update $STZ
Molson Coors Brewing Co. Valuation – November 2015 Update $TAP
Brown-Forman Corporation Analysis – September 2015 Update $BF/B
Brown-Forman Corporation Analysis – June 2015 Update $BF.B
Philip Morris International Annual Valuation – 2015 $PM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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