Retaliatory tariffs "wild card" for Brown-Forman – Analysis

In the same week as reporting its fiscal full-year results, Brown-Forman saw its share price fall by around 5%. The problem, analysts said in notes to clients afterwards, is the overhanging question of retaliatory tariffs from US trading partners.

Back in March, the European Commission listed a number of products - including American whiskey - that could be subject to tariffs levied in response to the imposition by the US of import duties on aluminium and steel. Then on 5 June, Mexico went ahead and implemented a 25% tariff on several US products, including whiskey. 

"While initial FY19 guidance was in line with our expectations, the notable wild card remains the potential for retaliatory tariffs, which are not being factored into the company's full-year outlook," writes Cowen's Vivien Azer. "As a reminder, over 50% of Brown-Forman's sales come from international markets, and recent press has indicated retaliatory tariffs from the EU on whiskey could be implemented as soon as 20 June."

Societe Generale's Andrew Holland expresses similar concerns. The share price fall was, according to Holland, " because of worries about the possible impact of tariffs". He flags last week's move by Mexico, adding that the country "represents only 5% of Brown-Forman's sales, but grew at 12% last year".

"If the EU and Canada follow Mexico's lead," he warns, "a further 19% of sales would be captured."

On a conference call following the results, incoming-CEO Lawson Whiting said markets in which Brown-Forman owns its own route-to-market, "which would be most of Europe", give the company "a lot more flexibility and control" over the situation. 

Societe Generale's Holland also stresses that tariffs are "applied to the import price – ie pre-excise duty and sales tax". He says that taking into account the tax burden, "the retail price increase needed to pass the tariff on may be 5% to 10%".

Meanwhile Stifel's Mark Swartzberg believes any tariffs imposed might not necessarily stick.

"We think the tariff on-off exercise is part of President Trump's art of the deal and note the recent reversal of a previously threatened tariff in China".

We will keep an eye on Trump's twitter feed for the latest. 

Brown-Forman fiscal-2018 - results data

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