Alcohol & Tobacco Stocks

Brown-Forman Corp Valuation – March 2019 #BF.B

Company Profile (excerpt from Reuters): Brown-Forman Corporation, incorporated on October 19, 1933, 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. The Company’s 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 Champagnes, 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.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of BF.B – March 2019

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 $24,015,987,587 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.08 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 60.76% Pass
6. Moderate PEmg Ratio PEmg < 20 31.88 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 16.19 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 3.08 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.24 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 $1.58
MG Growth Estimate 5.27%
MG Value $30.07
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $22.90
MG Value based on 0% Growth $13.42
Market Implied Growth Rate 11.69%
Current Price $50.35
% of Intrinsic Value 167.46%

Brown-Forman Corporation Class B 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 Overvalued after growing its EPSmg (normalized earnings) from $1.17 in 2015 to an estimated $1.58 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 11.69% 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 below the price.

At the time of valuation, further research into Brown-Forman Corporation Class B revealed the company was trading above its Graham Number of $10.05. The company pays a dividend of $0.61 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 31.88, which was above the industry average of 22.75. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-1.91.

Brown-Forman Corporation Class B receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$1.91
Graham Number $10.05
PEmg 31.88
Current Ratio 3.08
PB Ratio 16.19
Current Dividend $0.61
Dividend Yield 1.21%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2019
Total Current Assets $2,755,000,000
Total Current Liabilities $895,000,000
Long-Term Debt $2,301,000,000
Total Assets $5,163,000,000
Intangible Assets $1,405,000,000
Total Liabilities $3,670,000,000
Shares Outstanding (Diluted Average) 480,099,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.64
Apr2018 $1.48
Apr2017 $1.37
Apr2016 $2.09
Apr2015 $1.28
Apr2014 $1.22
Apr2013 $1.10
Apr2012 $0.95
Apr2011 $1.04
Apr2010 $0.81
Apr2009 $0.77
Apr2008 $0.76
Apr2007 $0.67
Apr2006 $0.55
Apr2005 $0.54
Apr2004 $0.43
Apr2003 $0.35
Apr2002 $0.35
Apr2001 $0.36
Apr2000 $0.34
Apr1999 $0.31

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.58
Apr2018 $1.53
Apr2017 $1.51
Apr2016 $1.49
Apr2015 $1.17
Apr2014 $1.08
Apr2013 $0.99
Apr2012 $0.91
Apr2011 $0.86
Apr2010 $0.75
Apr2009 $0.70
Apr2008 $0.64
Apr2007 $0.56
Apr2006 $0.48
Apr2005 $0.43
Apr2004 $0.38
Apr2003 $0.35

Recommended Reading:

Other ModernGraham posts about the company

Brown-Forman Corp Valuation – May 2018 $BF.B
Brown-Forman Corporation – February 2017 $BF.B
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

Other ModernGraham posts about related companies

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Altria Group Inc Valuation – January 2019 $MO
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Boston Beer Company Inc Valuation – July 2018 $SAM
Constellation Brands Inc Valuation – May 2018 $STZ
Brown-Forman Corp Valuation – May 2018 $BF.B
Philip Morris International Inc Valuation – March 2018 $PM
Altria Group Inc Valuation – March 2018 $MO
Molson Coors Brewing Co Valuation – March 2018 $TAP

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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