Brown-Forman: Entrenched Business, Driven by Jack Daniel’s Brand

Dave Sather of Sather Financial Group presented his in-depth investment thesis on Brown-Forman (US: BF.B) at Best Ideas 2019.

Thesis Summary:

Brown-Forman is an American spirits company that owns several brands, the largest of which is Jack Daniel’s.

Jack Daniel’s generates roughly 60% of the firm’s cases sold worldwide and has become a foundation for the growth of both new Jack Daniel’s products, such as Honey and Fire, and other brands owned by Brown-Forman.

The stock rarely trades at fair value but headwinds involving a 25% tariff on bourbon exports to Europe and a CEO transition have caused a 20% price decline since May. Given the inelastic demand of the industry and resilient staying power, the recent drop in price gives investors an opportunity to buy an extremely durable business at what Dave considers to be fair value.

The firm benefits from cost advantages associated with producing premium products and strong brand appeal which yields margins higher than competitors who generate revenue nearly 5x that of Brown-Forman. It’s existing value chain allows for newer brands to piggy back off of Jack Daniel’s in markets that are estimated to yield 10%+ CAGR’s over the next five years. Much of this growth stems from increased global demand, taking market share from global competitors, and consumer preference changes in the U.S. shifting from beer to higher end spirits.

Management has also prioritized returning value to shareholders by both reducing outstanding shares by 16% and more than doubling its dividend since 2008 and intends on continuing this capital allocation strategy. These factors have earnings estimated to grow between 10-15% over the next few years.

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About the instructor:

Dave Sather is a CFP and President of Sather Financial Group, a $600 million firm managing individual accounts, in Victoria, Texas. Dave has degrees in business from Texas Lutheran University and Texas A&M University. Dave is also Chairman of the Board of Business Bank of Texas and serves on the Investment Committee and Board of Regents at Texas Lutheran University. He developed and teaches the Bulldog Investment Company internship at Texas Lutheran University (www.BulldogInvestmentCo.com).