Why I'm Still Bullish On Brown-Forman by Ian Bezek

Summary:

I recommended Brown-Forman stock as my first pick of 2019; it's up 30-35% since then as part of the trade into dividend and defensive stocks.
The stock isn't a strong buy anymore, but for long-term investors, it's still a great holding.
If you own the B class of Brown-Forman stock, this is a great time to consider swapping into the A class of shares.
The A shares, despite having more economic value than the B shares, are trading at a 4% discount due to liquidity issues.
This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner. Get started today »

On January 2nd, I published my first article of the year, calling Brown-Forman (BF.A) (BF.B) a "solid defensive pick" that was well-priced and could shelter investors from the market turbulence we were facing at that time. It's had a nice result. BF has done more than play defense - in fact, it's up 30% or 35% year-to-date (more on that discrepancy in a moment).

With those gains, Brown-Forman stock has now topped last May's peak to hit new all-time highs. That probably shouldn't come as a surprise. With interest rates slumping, dividend stocks are back in favor. Many Dividend Aristocrats are now at or near new highs as investors have moved back toward growth and income names.

Brown-Forman, for its part, has some tariff issues, but nothing that's a serious obstacle to the company's long-term business strategy. Hence the stock going up even more:

This has brought out the usual Brown-Forman skeptics, who point to the company as being overvalued. While I'll stand by my claim that B-F stock was most reasonably priced in January, it's back to being at a fairly ambitious valuation again today.

Which gets back to the question, why buy a stock like Brown-Forman in the first place? Are we buying for rapid short-term gains, or are we purchasing with the intention of getting an impeccable quality growth and income asset with unique pluses (family ownership, good balance sheet, fantastic brand, and extremely high profit margins) in a recession-proof industry.

I commented on a recent article that addressed Brown-Forman's valuation, saying:

If you plan to sell the stock within the next two year, BF could reasonably end up somewhere between $50 and $75 by the end of 2021. [The then stock price of $58] is hardly compelling. If you plan to hold for at least a decade, it's hard to envision BF stock not being worth at least $100 even assuming below average EPS growth for the firm and a normal PE ratio compared to its historical median.
BF stock almost always looks expensive in the short-run. It almost always looks underpriced with hindsight if your holding period is considerable. Up to you. I own a lot.

B-F has been growing earnings around 7%/year since before the financial crisis. As such, it should double earnings again over the next decade, putting us at close to $4 of EPS in 2029. A 25x P/E ratio on that gets us a $100 stock. We're at about 32x forward P/E now and B-F stock historically trades around 30x so 25x is fairly conservative. If the P/E ratio stays up at 30x, then we have a $120 stock in a decade.

Assuming a 2% average dividend yield on cost over the stretch (this factors in dividend growth plus the occasional special dividend that BF tends to pay) you get annual returns of 7.6% if the stock is at $100 a decade from now, and 8.9% annually if the stock ends the next decade at $120 (based on a starting price of $58 per share).

Now let's imagine you bought BF stock in January at $47 when I last recommended it. Run the same calculations out to 2029, and you get annual returns of 9.5% (if it ends at $100) or 11.3% (if it ends at $120).

To summarize, here's what you can expect to get from your purchase from the following starting points:

BF stock at $47 - 9.5-11.3% annual returns for the next decade
BF stock at $58 - 7.6-8.9% annual returns for the next decade

Now, obviously, we'd rather buy at a sale price than full price. An expected return of 10%/year beats 8%/year. But both of these will absolutely smash bonds and fixed income, and if the stock market is overvalued crowd end up being right, you'll be far happier owning BF stock even from this starting price then you would be owning an index fund from S&P 3,000. Given the current investing environment, particularly in fixed income, getting a low-risk high-probability 8%/year from Brown-Forman is right near the top of list for places I want to park investment capital for the long haul.

Part of the value I add at Seeking Alpha is to remind folks when great companies are available at reasonable prices like Brown-Forman on January 2nd this year.

You aren't going to hit many home runs with short-term trading in a stock like BF, but you can add a lot of alpha to your long-term returns buying quality when it goes on sale. An ideal long-term stock holding is one that rallies at least as quickly as the overall stock market - as B-F has done this year, but which drops far less during bear markets.

...Originally Posted On Seeking Alpha

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