Wide-Moat Brown-Forman Invests to Grow Beyond Whiskey Stronghold, Shares not Cheap

Despite cost inflation and recessionary concerns that may stall consumer spending, we believe wide-moat Brown-Forman BF.B remains well-equipped to navigate macro and competitive challenges. Brand prowess in its core American whiskey assets and tight distributor relationship should enable the distiller to continue riding the premiumization tailwinds in spirits consumption. Meanwhile, the firm has a keen eye for growth beyond its core competency, which, coupled with partnership with beverage giant wide-moat Coca Cola, stepped up research spending and strategic acquisitions, should bolster the premium distiller’s long-term growth outlook.

Given its ambition beyond the whiskey stronghold, we expect the firm to raise advertising and capacity investments to capture growth in categories including ready-to-drink, gin, and rum. This positioned the firm well for the long term, though at the expense of margin expansion in the next few years. As such, we have lowered our fair value estimate to $67 (from $73), primarily due to a mid-single-digit reduction in our earnings estimates over the next five years. Over the 10-year projection period, we now expect topline to grow at 6% annually, alongside a 580-basis point expansion in operating margins to 37.9% in 2032 (relative to 2022), as the distiller extracts distilling and advertising efficiencies, and recovers from the trade tariff burden (now removed) and the pandemic-induced disruptions in the past three years.

Our revised fair value estimate implies a 35 times multiple against our adjusted 2024 earnings estimate and a 2024 enterprise value to adjusted EBITDA multiple of 24 times, which while lofty, aligns with its historical five-year averages of 38 times and 27 times, respectively. That said, with the Brown-Forman stock trading on par with our fair value estimate, we don’t see the current share price as offering an attractive risk/reward balance and suggest long-term investors await a better entry point.