Agenda
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Business Overview
Industry Overview
SWOT Analysis
Macroeconomic Analysis
Financial Position
Competitor Analysis
Multiples Valuation
Management Assessment
Pro-forma Assumptions
DCF
Recommendation
Business Overview
Brown-Forman Corporation
was founded in 1879 and
engages in the
manufacture, bottling,
import, export, and
marketing of alcoholic
beverage brands.
Sales mainly in the US
and Europe. Expanding in
Asia, Australia and
penetrating the
European market even
more.
• Jack Daniel’s Tennessee Whiskey
• Finlandia Vodka
• Herradura
• Southern Comfort
• El Jimador Tequila
Industry Overview
• The global alcoholic beverage industry is a multi-billion dollar a year
business.
• Growing shift away from mature markets in North America and Europe to
newer regions such as China, Australia and Russia.
• There is a plethora of small producers, however, M&A are very common.
There have been four waives of consolidation in the industry: 1950-1960 in
UK, 1968-1972 in Europe, 1985-1988 especially in the US and 1998
worldwide.
• The
industry
has
been
incorporating
concerns
regarding health-related aspects
and social issues in the last two
decades
• Production is heterogeneous
and includes a number of stages
SWOT Analysis
Strengths:
• Effective managements with increasing margins and cautious strategy
• J.D. is the largest selling whiskey in the world
• No shortage in supply. Large number of raw material sources
Threats:
• Drinking age regulation
• Taxation in liquor
• Uncertainty of sales of
smaller brands in new
markets
Weaknesses:
• Exposure to currency risk
• High dependence of
revenues on JD
• Very limited target group
of some of the brands
Opportunities:
• Expansion to new markets like China and Australia
• Further penetration in the European market
• Lower drinking age limitations outside the US
Macroeconomic Analysis
Drinking ages around the world
Macroeconomic Analysis
Population is expected to increase at a higher rate than in the previous years and the
percentage of the younger people will decrease.
Population is expected to get older on average and it is possible that brands targeting
older people will experience higher demand in the long run.
Macroeconomic Analysis
 Corn prices are expected to fall since supply will keep increasing.
• The department said U.S. farmers last year produced a record 13.2 billion
bushels of corn, up 8.8% from 2008.
• 2010 corn estimate is "an astoundingly huge number," said Jack Scoville, VP of
Price Futures Group in Chicago.
 Wheat prices are pretty low right now due
to the large supply and are expected to fall
even more in the long run.
 Inflation is estimated to stabilize in the
short run and slightly increase in the long
run.
Historical inflation
and projections
Macroeconomic Analysis
Wheat prices
Corn prices
Financial Position
• Organic growth
• Conservative in expansion
• Increasing Efficiency
Profitability
Net Profit Margin
30.0%
25.0%
20.0%
Brown Forman
15.0%
Fortune Brand
Diageo plc
10.0%
5.0%
0.0%
2005
2006
2007
Net Profit Margin
Company
Name
2005
17.3%
Brown Forman
Fortune Brand
Diageo plc
2008
2009
2006
16.5%
2007
17.5%
2008
17.0%
2009
17.5%
9.0%
9.7%
8.9%
4.1%
3.6%
20.1%
26.3%
19.9%
18.8%
17.4%
Liquidity
Current Ratio
3.50
3.00
2.50
2.00
Brown Forman
1.50
Fortune Brand
Diageo plc
1.00
0.50
-
2005
2006
2007
2008
2009
Current Ratio
Company Name
2005
2006
2007
2008
2009
Brown Forman
2.06
2.83
1.21
1.48
1.88
Fortune Brand
1.13
1.56
1.81
2.91
2.65
Diageo plc
1.31
1.45
1.24
1.20
1.56
Solvency
EBITDA Coverage
130.0x
110.0x
90.0x
70.0x
Brown Forman
50.0x
Fortune Brand
Diageo plc
30.0x
10.0x
-10.0x
2005
2006
2007
2008
2009
Interest Coverage Ratio
Company Name
2005
2006
2007
2008
2009
Brown Forman
34.2x
129.8x
36.9x
16.7x
21.1x
Fortune Brand
7.5x
4.7x
4.7x
1.4x
2.3x
36.6x
37.2x
34.3x
15.7x
5.7x
Diageo plc
Long-term Efficiency
Asset Turnover
0.80x
0.75x
0.70x
0.65x
Brown Forman
Fortune Brand
0.60x
Diageo plc
0.55x
0.50x
0.45x
2005
2006
2007
2008
2009
Interest Coverage Ratio
Company Name
2005
2006
2007
2008
2009
Brown Forman
34.2x
129.8x
36.9x
16.7x
21.1x
Fortune Brand
7.5x
4.7x
4.7x
1.4x
2.3x
36.6x
37.2x
34.3x
15.7x
5.7x
Diageo plc
DuPont Analysis
5 step DuPont
500.0%
0.30
450.0%
0.29
400.0%
0.28
350.0%
0.27
300.0%
250.0%
0.26
Financial Leverage
Asset Turnover
Net Income/EBT
200.0%
0.25
150.0%
0.24
100.0%
0.23
50.0%
0.0%
0.22
1
2
3
4
5
2008
2009
6
26.0%
24.0%
ROE
22.0%
20.0%
2005
2006
2007
2010
EBT/EBIT
EBIT % of Sales
Competitor Analysis
• Diageo (DEO), registered in UK
– Largest , Mkt Cap $43.94B
– Famous brands: Johnnie Walker, Guinness, Bailey,
Smirnoff, Hennessy
• Fortune Brand (FO), registered in US
– Closest competitor, Mkt Cap $8.03B
– Famous brand: Jim Beam
Competitor Analysis
• Campari (CPR), registered in Italy
– Larget in Italy, Mkt Cap $2.2B
– Famous brand: SKYY
• Pernod (PER), registered in France
– Largest in France, Mkt Cap $17.4B
– Famous brands: Absolut Vodka, Malibu, Chivas, Ricard
• Remy (RMYI), registered in France
– Mkt Cap $2.1B
– Famous brand: Remy Martin
Multiples Valuation
Current Market Multiples DEO
P/E
18.55
P/B
7.27
P/S
2.98
EV/EBITDA
13.72
P/E
P/B
P/S
EV/EBITDA
CPR
PER RMYI FO
16.46 16.46 25.40 30.93
2.15 2.08 1.97 1.46
2.23 2.48 2.68 1.11
12.13 13.72 16.28 15.21
Median Average
18.55 21.56
2.08
2.99
2.48
2.30
13.72 14.21
P/E
P/B
P/S
EV/EBITDA
DCF
Fair Value
Median
53.26
26.64
30.01
60.13
50.25
Average Weight Median Average
61.8988 0.20 10.65
12.38
38.2507 0.05 1.332
1.91
27.7816 0.05
1.5
1.39
62.2914 0.40 24.05
24.92
50.25
0.30 15.08
15.08
52.61
55.67
Management Assessment
 Quite accurate most of the times in EPS estimation.
 In 2006 : Claimed 3.10 – 3.30  Result 2007 : EPS = 3.26
 In 2007 : Claimed ESP ↓ by 0.2  Result 2008 : EPS ↓ by 0.4
 CAPEX estimation always higher than the realized one.
 2008 : 65-75M  2009 : 49M
 2007 : 70M  2008 : 41M
 Good Brand Managers
 Diversified portfolio of products.
Assumptions
HISTORICAL
REVENUE ASSUMPTIONS
% Revenue Growth
Growth From Acquisitions
Core Growth
Long Term Growth
OTHER ASSUMPTIONS I/S
COGS / Sales
SG&A / Sales
D&A / Gross PP&E
Tax Rate
OTHER ASSUMPTIONS B/S
Cash&Equivalents / Sales
Accounts Receivable / Sales
Accounts Payable / COGS
Inventory / COGS
2007
FORECASTED
2005
2006
2008
10.2%
9.9%
16.3% 17.0% -2.7%
10.2%
9.9%
3%
13.3%
7%
10%
2009
2010
2011
-
-
-2.7% 2.00% 5.00%
Historical
2012 -2019
Avg
8.00%
8.1%
28.3% 26.4% 26.3% 27.0% 28.3%
32.5% 32.8% 31.9% 30.7% 28.8%
5.5% 5.3% 4.8% 5.2% 5.4%
32.7% 29.3% 31.7% 31.7% 31.0%
27.0%
31.0%
5.2%
32.5%
27.0%
30.8%
5.2%
32.5%
27.0%
30.5%
5.2%
32.5%
27.3%
31.3%
5.2%
16.6%
13.5%
12.7%
75.6%
10.0%
13.0%
13.0%
76.3%
10.0%
13.0%
13.0%
76.3%
10.0%
13.0%
13.0%
76.3%
14.4%
13.3%
13.6%
76.3%
24.4%
13.4%
14.0%
80.3%
12.8%
14.4%
16.0%
94.2%
4.6%
13.8%
14.5%
77.2%
13.7%
11.5%
10.6%
72.1%
WACC Calculation
CAPM
Cost of equity (Ke)
Beta
Market risk premium
10-year yield
CAPM+ Alpha
ROE
7.80%
0.62
6%
4.10%
14.10%
8.60%
Weights
Market Cap.
Total Capital
Debt-Value ratio
Equity-Value ratio
8,610
9,119
5.58%
94.42%
WACC
10.02%
Cost of Debt
Cost of debt (Kd)
Debt
Interest Expense
7.27%
509
37
Tax Rate
32.50%
Return on Equity
ROE
CAPM
Return on Equity
40%
60%
10.32%
WACC Calculation
CAPM
Cost of equity (Ke)
Beta
Market risk premium
10-year yield
CAPM+ Alpha
ROE
7.80%
0.62
6%
4.10%
14.10%
8.60%
Weights
Market Cap.
Total Capital
Debt-Value ratio
8,610
9,119
5.58%
Equity-Value ratio
94.42%
WACC
10.02%
Mkt Return
Mkt Premium
CAPM return
Alpha
1.18%
-2.92%
2.30%
6.30%
Cost of Debt
Cost of debt (Kd) 7.27%
Debt
509
Tax Rate
32.50%
Return on Equity
ROE
40%
CAPM
60%
Return on Equity 10.32%
Correlations
BFB correlations
WAG
42.09%
JKHY
41.52%
MCD
35.22%
DO
35.11%
AEO
31.84%
MOS
30.37%
WFR
29.48%
Correlations
42.09%
41.52%
35.22%
35.11%
31.84%
WAG
JKHY
MCD
DO
AEO
30.37%
MOS
29.48%
WFR
Recommendation
• Based on the fundamental analysis and after
incorporate the most significant factors:
– DCF Model: $50.25
– Multiples: between $26 to $62
• Recommendation: Watch List