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Analysis - Brown-Forman: Because They're Happy

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The future looks bright for most international brown spirits companies, but few appear to be in quite as good a shape as Brown-Forman.

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One can forgive the US company's optimism, especially after it posted such a healthy set of Q3 and year-to-date results yesterday (5 March). After all, a 10% rise in nine-month net profits off the back of a 5% lift in sales is nothing to be sniffed at.

A closer look at the numbers brings more reasons to be cheerful. “Of special note,” says Stifel in a note to clients this morning, “is Brown-Forman's performance in China, up double digits despite the Government's anti-extravagance campaign.” While the likes of Pernod Ricard and Remy Cointreau flag the country as providing a major drag to its bottom line, Brown-Forman is better-positioned in the country. “The company cites (its position in China) as a potential competitive advantage given its 'premium' as opposed to 'ultra luxury' price points.”

So, while some are struggling in China, a market that - according to all international players - still offers terrific potential in the longer term, Brown-Forman's brands are doing the business, albeit off a smaller base, relatively speaking.

Besides, and most importantly, growth is growth.

On top of this, Brown-Forman is in rude health as far as its bank is concerned. As Nomura says today, the company has committed US$250m to a buyback programme, while also confirming an annual dividend amount to a capital return of around $500m.

“This does appear to suggest that M&A is unlikely in the near term,” Nomura believes. And yet, “in the medium term, we see the company focused on expanding its whiskey portfolio with Scotch or Irish whiskey, as well as acquisitions of local brands.”

The company's reserves “could allow for M&A activity of over $3bn if the company were willing to leverage up to 3.5x (net debt to EBITDA)”, Nomura estimates.

There's no feeling better than going shopping with a bulging wallet, is there?


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