Monday, December 12, 2011

Brown-Forman Alcohol Santa Claus Rally


After reviewing the DJIA, SP500, and Nasdaq indicies, it very possibly looks like a Santa Claus rally could happen this week. I'm still skeptical on a longer-term upside rebound in the markets but short-term its looking more doable currently. If taking any new positions long or short as always use stop-loss in case the market goes against your position.

According to Zacks Investment Research, Brown-Forman Corp. (BF.B) reported a record fiscal 2012 second-quarter result, as it is first time in the company’s history that it crossed the $1 billion sales mark.

The company’s reported earnings of $1.09 per share came in line with Zacks Consensus Estimate and grew 3.8% from the year-ago earnings of $1.05.The robust increase in quarterly earnings was primarily driven by strong top-line growth and volume gains.

During the quarter earnings per share grew 8% after excluding the net effect of Hopland-based wine business.

Quarterly Details

Brown-Forman's net sales recorded a growth of 11.9% to $1,013.7 million from $905.7 million in the prior-year quarter. The growth was primarily attributable to solid performance in Germany, Turkey, France, the U.K., Russia, Canada, Australia and Brazil, which was more than offset by declines in Poland and Spain. Total Revenue beat the Zacks Consensus Estimate of $966 million.

During the quarter, Brown-Forman's gross profit grew 9.4% from the prior-year quarter to $501.9 million primarily driven by increased volumes. However, gross margin contracted 120 basis points (bps) year over year to 49.5% due to increased input and excise costs.

During the quarter, the company made huge advertising expenses in order to support several brand innovation launches. Advertising expenses increased 14.1% year over year to $106.7 million. Selling, general and administrative expenses surged 10.5% year over year to $146.8 million due to increased salary and related expenses. Conversely, Brown-Forman's operating profit grew 4.8% from the prior-year quarter to $246.3 million, while operating margin contracted 160 basis points to 24.3% from the prior-year period.

Balance Sheet & Cash Flow

Brown-Forman ended the quarter with cash and cash equivalents of $380.1 million and long-term debt of $504.2 million.

During the first six months of fiscal 2012, Brown-Forman generated $155.5 million of cash from operations and deployed $92.4 million for dividend payout, and $18.8 million on capital expenditures. On November 30, 2011, Brown-Forman’s $250 million share repurchase program expired. During the program period, the company repurchased a total of 3.4 million shares for $234 million, at an average price of $69.39 per share.

Dividend

During the quarter, Brown-Forman paid a regular quarterly cash dividend of 35 cents a share on Class A and Class B common stock, an increase of 9.4% over the prior dividend. This is the company’s 28th consecutive year of dividend growth.

Guidance and Zacks Consensus

Moving forward, Brown-Forman expects strong improvement in customer trends in the remaining period of fiscal 2012. However, it also anticipates that the stronger U.S. dollar value may have an adverse impact on its bottom-line. Accordingly, the company has lowered its upper end of earnings guidance. Currently, Brown-Forman expects fiscal 2012 earnings in the range of $3.45 to $3.70 per share instead of $3.45 to $3.85. Currently, the Zacks Consensus Estimate stood at $3.63 per share.

Buy Long Brown-Forman - Ticker BF.B - Short-Term Momentum Trade

Buy Entry: 77.45 - 81.50

Stop-Loss: 73.31

Take Profit Areas: 82.65 - 83.09, 87.47 - 87.91

Company Profile

Brown-Forman Corporation engages in manufacturing, bottling, importing, exporting, and marketing alcoholic beverages. The company offers its products primarily under the brand names of Jack Daniel’s, Gentleman Jack, Southern Comfort, Finlandia, Antiguo Tequila, Canadian Mist, Chambord, Don Eduardo, Early Times, el Jimador, Herradura, Korbel California, New Mix Ready-to-Drinks, Old Forester, Pepe Lopez Tequilas, Sonoma-Cutrer, Tuaca, and Woodford Reserve. It sells its products to wholesale distributors and state governments. The company markets its products primarily in the United States, Australia, the United Kingdom, Mexico, Poland, Germany, France, Canada, Japan, Spain, Turkey, South Africa, Russia, Italy, and China. Brown-Forman Corporation was founded in 1870 and is based in Louisville, Kentucky.

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