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Can Brown-Forman's (BF.B) Efforts Help the Stock to Rebound?

Brown-Forman Corporation BF.B has been witnessing a rough phase, primarily due to its dismal earnings trend, weak fourth-quarter fiscal 2017 results along with other major concerns like currency headwinds. However, management is trying hard to revive and remains encouraged by its Jack Daniel's family of brands, premium bourbon and tequila brands.

Let’s explore the pros and cons of this Zacks Rank #3 (Hold) company.

Dismal Performance

Brown-Forman’s fiscal fourth quarter marked its second straight earnings miss, and third in the trailing four quarters. In fact, it recorded an average negative earnings surprise of 2.5% in the last four quarters, which also includes a quarter where earnings met the estimates. In addition, the company’s top line lagged the Zacks Consensus Estimate in 13 of the last 16 quarters, including the recently reported quarter.

In the fiscal fourth quarter, results were hurt by the acquisition and divestiture activity, alongside currency headwinds and lower distributor inventory levels. Also, sales were marred by the divestiture of Southern Comfort and Tuaca in fiscal 2016. Moreover, operating income plummeted 71% to $212 million, with operating margin contracting substantially to 30.5% from 99.5% in the year-ago quarter. However, operating margin rose 13% on an underlying basis.

Further, earnings for fiscal 2018 are anticipated in the range of $1.80–$1.90 per share, including a modest negative influence from foreign currency headwinds, higher tax rate and the establishment of owned distribution center in Spain. Meanwhile, the Zacks Consensus Estimate is currently pegged higher at $1.85 for the fiscal year.

Consequently, Brown-Forman’s shares declined 8.3% since it reported earnings results on Jun 7. In fact, the stock dipped 1.8% in the last month against its industry’s rally of 2.3%. Currently, the industry is placed at top 9% of the Zacks Classified industries (23 out of 256).

Other Headwinds

The company remains prone to adverse currency translations, which hurt its top-line growth in the fiscal fourth quarter by 3% and fiscal 2017 by 2%. Going forward, management continues to feel the pinch of currency headwinds and forecasts the same to dent its fiscal 2018 earnings.

Brown-Forman’s performance is also challenged by the excise tax levied on distilled spirits by governments of respective countries. Volatile global economic and geopolitical environment, coupled with competitive pressures further add to the woes.

Growth Avenues

Armed with a strong portfolio of globally recognized brands, Brown-Forman gains strength from its premium American whiskey brands, along with its Jack Daniel's trademark. The company expects to grow on the back of strong demand for its authentic American whiskey brands worldwide, consumer interest in flavored whiskey and a growing trend in premium spirits. Further, its consistent focus on pricing, product innovation and expansion strengthen its market position.

Brown-Forman vs. Industry

Bottom Line

So let’s wait and see if Brown-Forman can counter the hurdles and able to spark a turnaround. Meanwhile, investors might focus on some better-ranked stocks in the same industry, including Constellation Brands, Inc. STZ, Ambev S.A. ABEV and The Boston Beer Company, Inc. SAM.

Constellation Brands, with a long-term earnings growth rate of 18.2%, has delivered an average positive earnings surprise of 11.7% in the last four quarters. Also, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ambev carries a Zacks Rank #2 (Buy) and has a long-term earnings growth rate of 5.9%.

Boston Beer, a Zacks Rank #2 stock, has pulled off an average positive earnings surprise of 30.6% in the last four quarters.

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