Brown Forman’s Chief Production Officer Bought The Stock

We can compare Brown-Forman to other alcoholic beverage companies such as Constellation Brands, Inc. (NYSE:STZ), Beam Inc (NYSE:BEAM), Boston Beer Co Inc (NYSE:SAM), and the market leader Diageo plc (NYSE:DEO), owner of brands such as Johnnie Walker and Crown Royal. With the exception of Constellation, these stocks have trailing earnings multiples greater than 20 as well. Boston Beer actually trades at 32 times trailing earnings, though that company is experiencing high growth in revenue and earnings. Even so, short interest in that stock is very high. Beam and Diageo are expected to perform well on a forward basis, bringing their P/Es for that period down to a more reasonable level, but we’d still hesitate to buy the stock in each case. Constellation is up 84% in the last year, and with moderate improvement in its financials it carries trailing and forward P/Es of 17 and 14 respectively. This gives it a significant discount to its peers, and its business seems to be performing about in line with Brown-Forman.

We don’t like the alcoholic beverage industry in general- it looks to us that the valuations are too high for what is generally considered a low growth consumer staple business. Brown-Forman, despite its recent insider buy, appears to be in line with its peers: we would expect modest improvements on the bottom line going forward, but a trailing P/E of 25 should correspond to higher growth rates than that. As a result we wouldn’t recommend that investors imitate this insider purchase.

Disclosure: I own no shares of any stocks mentioned in this article.