Why I'm Long Brown-Foreman

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 (NYSE: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.

(Potential) Negatives

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.