BF.A/BF.B - Brown-Forman

[Kapitalust]

With Brown-Forman hovering around its 52-week lows, the price for a piece of the business has come down to a "fairer" range.

 

While this isn't one that is going to provide explosive gains over the next 1, 5, 10 years (outside of P/E expansion, which I wouldn't bank on), it does seem to have the potential to provide 5~12% total returns while providing defensive characteristics.

 

Quick thoughts on positives:

 

+Long history of consistently high margins

+Long history of consistently high ROE, ROC, ROA, ROIC, ROCE

+Long history of consistently growing dividend payments

+Long history of consistent dividend payout ratio of ~35%

+Long history of consistent share repurchases

+Long history of consistent growing free cash flow

+Low CAPEX requirements in the ~15-20% range of Operating Cash Flow

+Low reinvestment requirements back into the business to generate revenue/profits/cash

+Stable of strong brands

+Tailwinds provided by resurgence in cocktails and bourbon

+Distribution network advantages of being a ~$17b player in the market vs. much smaller craft distillers

 

Quick thoughts on the negatives:

 

-Explosion in craft distilleries in the US = increased competition and battle for retail shelf space and consumer hearts & minds

-Higher advertising costs due to increased competition noted above

-Erosion of market share due to increased competition

-New aging technologies for whisky that may assist smaller players in getting their products to market faster

-Increased popularity in craft distillers could signal a bubble in the industry, so what looks like tailwinds might actually turn into a headwind if more and more products come online for consumers

-Margins could be challenged or even decrease due to the explosion in smaller distillery competition

-Bourbon might be a fad and tastes quickly change to something else (Canadian whisky was very popular in America in the 1980s, yet not popular any longer)

-Although the price is at 52-week lows, it might still not be cheap enough if the industry is in a bubble and the bubble pops or slowly deflates

-Revenue and Net Income growth over the past decade was ~4%. If looking at similarish organic growth going forward, their could be an impact as interest rates start rising (if they do start rising)

 

Weighing the positives and negatives, it currently does look interesting near these prices based on history. The negatives are a bit more forward facing and indicates the potentially serious challenges ahead.

 

Would love to hear other thoughts!

[kirkomi]

+Long history of consistently growing dividend payments

Dividend (2007): 0.33

Dividend (2016): 0.69

Growth: 8%

Dividend yield: 1.5%

 

+Long history of consistent share repurchases

 

Shares (2007): 465m

Shares (2016): 408m

Reduction: 1.4%

 

Earning growth rate: ~ 7%

 

Back of the envelope earning multiple to pay: 7 + 1.4 + 1.5 ~ 10. Considering that it is a very predictable business, run by good management, I will be willing to pay a fair price of 15 times earning. Above it, I find it expensive.

 

Edit:

 

After digging a little bit deeper, it turns out that 2015 was a good year for them and the earnings came out quite high at ~ $1B. The "normalized" earning for this year, I would expect to be ~ 700m. So, paying $17B for a company that earns $700m is closer to a earning multiple of 25!