Brown-Forman 'Fully Valued,' And Craft Alcohols Continue To Threaten The Whiskey Space

Brown-Forman Corporation (NYSE: BF-B) shares are lower following weak fourth-quarter results that came in below expectations.

Credit Suisse believes the company is fully valued and is struggling to find upside in the current business model. Additionally, the risk-reward scenario appears balanced. The firm downgraded the company from an Outperform to a Hold rating, while the price target was raised slightly from $51 to $53.

Downgrade, Price Target Rationale

A key risk to Brown-Forman’s price target is the "threat to the whisky category from the proliferation of flavors and 'craft' entries by competitors." Craft beer and liquor has been a risk to established brands as the trend continues to gain mainstream traction. Craft liquor has been the hot topic in the industry recently, with its growth outpacing craft beer growth, with premium whiskey leading the way.

Brown-Forman has worked to combat this threat by investing in craft brands to bolster its portfolio, including BenRiach, Slane and Coopers Craft.

“We continue to think that management is taking the right steps to position the business for the long-term by divesting underperforming brands and investing in more premium ones,” said Credit Suisse analyst Laurent Grandet.

"We see the increased competition of 'craft' and flavored whiskies as a potential concern in the short term asshelf space, brand visibility, and innovation introduction will be more challenging to maintain or execute," Grandet said.

This could require additional marketing or commercial investments from Brown-Forman to maintain a leadership position with its flagship brand Jack Daniels. The influx of craft whiskies could just be a current trend however.

“Longer term we think the value derived from inherent craftsmanship and authenticity of Brown-Forman brands will prevail over many of the so-called – but well marketed – craft new comers,” concluded Grandet (check out Laurent Grandet's track record).