My portfolio already has some exposure to several depressed financials and fixed income closed end funds, so I was looking to add some global companies that are relatively unaffected by the sub-prime crisis in the US. I decided to buy a starter position in Brown Forman (BF.B) yesterday. Here are some of the positives and negatives.
1) Brown Forman owns some of the most valuable liquor brands (e.g. Jack Daniels, Finlandia, Southern Comfort). It is the largest American-owned spirits and wine company and sells its 35 brands in more than 135 countries. BF has been growing underlying earnings about 10% a year. They are very focussed. I like to invest in companies that use "roll-up" strategies. Brown Forman has been quite successful with a brand acquisition strategy which is much easier to do than acquiring whole companies. They have also done a good job in divesting brands and businesses when they feel that they will not meet their future growth targets.
2) Their super-premium developing brands (e.g. Chambord, Woodward Reserve, Sonoma-Cutrer, Casa Herradura) have super to ultra-premium price points and high gross profit margins. These brands represent about 6% of net sales in 2007, but are growing at double digit rates.
3) The company pays a growing dividend and has treated shareholders fairly. Look at a 15-year price chart to see what I mean.
4) The company recently announced earnings with a headline EPS number only up a penny and the stock sold off a bit. But after GAAP adjustments they made their numbers.
5) Return on invested capital in 2007 was 17.4%. This was down from 2006 because of some acquisitions, but the company has generated returns near 20% over the last five years.
1) There are two share classes. The A shares have all of the voting rights, are very illiquid and are mainly owned by the Brown family. The B shares sell at a discount to the A's and are fairly liquid (I purchased the B shares). Depending on management, this could be a big problem, but the Brown Forman management has treated the B shareholders fairly and have done a great job in building shareholder value.
2) There is little or no takeover potential here. But I plan to hold BF-B as a long term investment and would like to see existing management continue building shareholder value. I'm not looking for a quick profit.
Full Disclosure: I am long Brown Forman B shares.