Brown-Forman Earnings Preview

Brown-Forman Corporation (NYSE:BF.B), one of the world's leading producers and distributors of premium alcoholic beverages, is scheduled to report its first-quarter 2012 financial results before the market opens on August 31.

The current Zacks Consensus Estimates for the quarter is earnings of 83 cents a share. For the quarter under review, revenue is expected at $769.0 million, according to the Zacks Consensus Estimate.

Fourth-Quarter 2011 Synopsis

On June 9, Brown-Forman reported fourth-quarter 2011 earnings of $1.13 a share compared with 49 cents in the year-ago quarter. The Zacks Consensus Estimate for the quarter was 64 cents a share. The robust increase in quarterly earnings was primarily driven by strong top-line growth and improved margin along with benefit from sale of the Hopland wine business and low tax rate.

Brown-Forman's net sales recorded a growth of 8.0% to $791.3 million from $733.0 million in the prior-year quarter. The growth was primarily attributable to solid performance in Australia, the U.K., Mexico, Turkey, Germany, and France.

During the quarter, Brown-Forman's gross profit grew 12.0% from the prior-year quarter to $423.3 million, while gross margin increased 200 basis points (bps) year over year to 53.5%. Advertising expense climbed 11.0% year over year to $99.7 million, primarily due to higher spending to support Jack Daniel's Tennessee Honey brand.

Guidance for Fiscal 2012

Brown-Forman anticipates moderate improvement in global economic conditions and customer trends in fiscal 2012. Accordingly, the company has delivered its earnings guidance in the range of $3.45 to $3.85 per share.

First-Quarter 2012 Zacks Consensus

The analyst covered by Zacks expects Brown-Forman to post first-quarter 2012 earnings of 83 cents a share, significantly higher than earnings of 76 cents delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between 80 cents and 85 cents a share. Not a single analyst has revisited her estimate for the upcoming first-quarter 2012 over the last seven and 30 days, thereby keeping the Zacks Consensus Estimate constant at 83 cents.

Mixed Earnings Surprise History

With respect to earnings surprises, Brown-Forman has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of approximately negative 9.5% to positive 25.0%. The average remained at approximately 8.0%. This suggests that Brown-Forman has beaten the Zacks Consensus Estimate by an average of 8.0% in the trailing four quarters.

Our View

Brown-Forman is one of the leading producers and distributors of premium alcoholic beverages in the world. The company commands a strong portfolio of globally recognized brands, such as Jack Daniel's, Finlandia, Southern Comfort and Canadian Mist. This provides a competitive edge to the company and bolsters its well-established position in the market.

Moreover, in a streak to optimize shareholders' return, Brown-Forman has divested its California based asset, Fetzer Vineyards to Vina Concha y Toro S.A., a Chilean wine producer for $238.0 million. The divestment has improved its earnings by 26 cents per share for fiscal 2011. Moreover, the deal will help Brown-Forman to concentrate on those markets, which offer better growth prospect and higher returns.

Further, Brown-Forman plans to expand Jack Daniel's market share in developed markets, such as France and the U.S., and emerging markets such as Russia, Poland, and Mexico, where the whiskey category is in early stages of development. In near future, the company also seeks to expand the sphere of other brands, such as Gentleman Jack, Jack Daniel's Single Barrel and Jack Daniel's ready-to-drinks within Jack Daniel.

However, the company faces intense competition from other well-established players in the industry, including Fortune Brands Inc. (FO) and Diageo plc (NYSE:DEO). Brown-Forman also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company's future operating performance.

Brown-Forman's shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Outperform.