Why Brown-Forman Is Selling Brands to Sazerac

Last Week's Best and Worst Performers in the Consumer Sector

(Continued from Prior Part)

Price movement of Brown-Forman

Brown-Forman (BF.B) rose by 1.3% to close at $92.74 per share as of January 14, 2016. The price movement on a weekly, monthly, and year-to-date (or YTD) basis is -0.66%, -8.2%, and -6.6%, respectively.

Technically, the stock has broken the support and is trading below all moving day averages. Currently, Brown-Forman is trading 6.1% below its 20-day moving average, 9.0% below its 50-day moving average, and 6.8% below its 200-day moving average.

The PowerShares Dynamic Food & Beverage Portfolio (PBJ) invests 4.8% of its holdings in Brown-Forman. The ETF tracks a multifactor, tiered equal-weighted index of US food industry stocks.

The PowerShares DWA Consumer Staples Momentum Portfolio (PSL) invests 3.8% of its holdings in Brown-Forman. The ETF tracks an index of US consumer cyclical firms selected and weighted by price momentum.

The market cap of Brown-Forman’s competitors are as follows:

• Diageo-ADR (DEO): $66.2 billion

• Constellation Brands (STZ): $28.6 billion

Brown-Forman’s agreement with Sazerac

Brown-Forman has entered into an agreement to sell its Southern Comfort and Tuaca trademarks to Sazerac for $543.5 million. This agreement reflects its evolving portfolio strategy and will close by March 1, 2016. This sale will provide a one-time operating income gain of ~$475 million in fiscal 2016.

Performance of Brown-Forman in recent fiscal 2Q16

Brown-Forman reported 2Q16 net sales of $1,096.0 million, a fall of 3.4% compared to the net sales of $1,135.0 million in fiscal 2Q15. Its net income fell to $200.0 million in fiscal 2Q16 compared to its net income of $208.0 million in fiscal 2Q15. The company reported EPS (earnings per share) of $0.97 for fiscal 2Q16 and fiscal 2Q15.

Meanwhile, its cash and cash equivalents fell by 47.3%, and inventories rose by 12.0% in fiscal 2Q16 compared to fiscal 4Q15. Its debt-to-equity ratio rose to 2.1 in fiscal 2Q16 compared to the debt-to-equity ratio of 1.2 in fiscal 4Q15.

The PE (price-to-earnings) and PBV (price-to-book value) ratios of Brown-Forman are 28.2x and 13.4x, respectively, as of January 15, 2016.

Projections

The company has made the following projections for fiscal 2016:

• net sales to rise in the range of 6% to 7%

• operating income to rise in the range of 8% to 10%

• diluted EPS in the range of $3.40 to $3.60

Browse this series on Market Realist:

• Part 1 - Who Were the Outliers in the Consumer Space Last Week?

• Part 2 - Lululemon Raised Projections and Seres Made Deal with Nestle

• Part 3 - Henry Schein Acquired RxWorks and Greggs Increased Sales