March20,2016

CORPORATEVALUATION

Govanny Quintana

GovannyQuintana

Beverages - Wineries &

Distillers

Ticker: BF.B

Recommendation: Sell

Business Description
Brown-Forman Corporation, incorporated on October 19, 1933, manufactures,
bottles, imports, exports, markets and sells alcoholic beverages. The company
produces and markets some of the loved and well-known brands in the world,
such as Jack Daniels, Canadian Mist, and Southern Comfort. Their biggest brand,
Jack Daniels, is the worlds largest American whiskey brand
The companys brands are supported by approximately 4,000 employees around
the world and their products are available in over 130 markets. After years in the
industry, the company still intends to build its brands to thrive and endure for
generations.

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BrownFormanCorp.

Primary and Secondary Market/Products

Brown-Formans primary market is the United States which account for over 43%
of its total sales and international sales are 53%, compared 40% ten years ago. Its
primary product is Jack Daniels line of whiskey which accounts for the majority
of its sales.
There are various versions of Jack Daniels such as Gentleman Jack, Tennessee
Honey, and Tennessee Fire. They also see the tequilas El Jimador, Don Eduardo
and Tequilla Herradura as well as the vodka, Finlandia.

Business Risk/Outside Litigation

Brown-Forman is going to struggle as it enters emerging markets will hurt future
earnings. It is struggling in those markets where weakening economies have made
it harder for consumers to buy its higher-priced American whiskeys. Sales in those
emerging markets declined 11% during the quarter ended Jan. 31, lowering the
companys net sales 1% from a year earlier to $1.08 billion and leading it to cut its
earnings outlook for the year.

Business Strategy
Brown Formans business strategy consist of

Strengths
Established company
Brand Recognition
Strong distribution network

Opportunities
Enter wine market
Invest more in emerging
markets
Acquisitions

Weakness
Concentrated revenue stream
from Jack Daniels brands
Lack of products

Threats
Government intervention
Foreign exchange rates
Industry consolidation

Revenue Drivers
Brown-Formans top revenue driver is the Jack Daniels family of whiskey which
account for most of their sales. Their increasing global presence has reached out
to over 170 countries.
Expense Drivers
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Brown-Formans expense drivers are currency rate exchange. Due to a stronger

dollar conversion cost are higher. As a result, it eats at Brown-Formans profit
margin. Other expense drivers are

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Recent Quarter Performance

Underlying net sales increased 5%:

The Jack Daniels family of brands grew underlying net sales 7% (-1%
reported)

Jack Daniels Tennessee Honey grew underlying net sales 11% (+2%
reported)

The companys super- and ultra-premium whiskey brands grew underlying

net sales double digits, including 29% underlying net sales growth from
Woodford Reserve (+30% reported)

Developed markets grew underlying net sales 6% (+1% reported), in-line

with trends through the first half of fiscal 2016 as well as results in fiscal
2015

Underlying operating income increased 7%

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On January 14, 2016, the company announced the $542 million sale of
Southern Comfort and Tuaca, which closed on March 1, 2016. Underlying
net sales for these brands declined 6% (-11% reported)

On January 28, 2016, the company announced a new buyback

authorization of $1 billion.

The company has returned almost $1 billion to shareholders in the first

nine months of fiscal 2016, including share repurchases of $762 million
and dividends of $199 million.

Financial Analysis
Brown-Forman is a strong company that consistently returns cash to its
shareholders through share repurchase and dividend payouts. Brown Forman has
regularly paid quarterly cash dividends for the past 70 years, while increasing the
same for the last 32 years. During the first half of fiscal 2015, Brown-Forman
returned approximately $171 million to shareholders in the form of quarterly
dividends. Also, over the same period, the company repurchased 3 million shares
for $269 million. This tactic reflects the company's obligation in enhancing longterm value for shareholders as well as its ability to boost earnings as well as cash
flows in the long run. They also have a strong cash flow and balance sheet which
provide Brown-Forman with the financial flexibility to make shareholder-friendly
moves while creating opportunity for expansion of operations in emerging
markets and product innovation.

Peer Group Analysis

Competitors
Brown Formans major competitors are Diageo, Constellation Brands, and
Pernod-Ricard. Each sell various whiskeys, tequilas, and wines.

Porters 5 Forces
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Threat of Competition (High)

Very competitive industry including international giants like Constellation
Brands and Diageo
Brown Forman has brand awareness and recognition
Threat of New Entrance (Moderate)
Economies of scale
Distribution channels
Threat of Substitute (Moderate)
Craft whiskeys and spirits
Vodka, beer, and other alcohol
Power of Suppliers (Low)
Brown-Forman has good relationship with distributors
Brown-Forman has a
Power of Buyers (Moderate)
Jack Daniels is a well known brand
Higher price point compared to competitors

Assumptions

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Conclusion

I believe that Brown-Forman is overvalued and due to market conditions

internationally their earnings will decrease. In the prior years their losses overseas
have been have been offset by U.S sales. However, Brown-Forman has missed
their earnings target for the fiscal year 2015 and due to its recent sale of Southern
Comfort and Tuaca to Sazarac Co. for $542 million I feel that they will not be
able to do so for the 2016 fiscal year end on April 30th.

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Citations
(n.d.). Retrieved March 30, 2016, from http://www.brownforman.com/static/_down/BF_CR_Report_2015-16_scorecard2015.pdf
Brown-Forman revises 2016 financial forecast. (2016, March). Retrieved April 01, 2016, from
http://www.thespiritsbusiness.com/2016/03/brown-forman-revises-2016-financial-forecast/
(2015, June). Retrieved from http://www.brown-forman.com/wp-content/uploads/2015/06/BrownForman-2015-Form-10k.pdf
Beverages - Wineries & Distillers Overview: Industry Center - Yahoo Finance. (n.d.). Retrieved March
29, 2016, from https://biz.yahoo.com/ic/347.html
Moody's say's Brown-Forman's new $1billion share repurchase program is credit negative but no change
to A1 rating or outlook. (n.d.). Retrieved March 30, 2016, from
https://www.moodys.com/research/Moodys-says-Brown-Formans-new-1billion-share-repurchaseprogram-is--PR_343143

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