Rumor has it Jose Cuervo, the world's largest tequila maker, is on the block for $2 billion. The likeliest buyer is Diageo (NYSE:DEO) who already distribute the brand outside of Mexico. The only problem with this scenario is Diageo is also the front-runner to snag Fortune Brands' (NYSE:FO) liquor assets for an estimated $10 billion. Whatever happens, I doubt Louisville-based Brown-Forman (NYSE:BF.B) will be involved, and this is just one of many reasons to like the family run liquor company.
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This company doesn't throw money around like drunken sailors. Between 2000 and 2010, it spent just $1.7 billion on acquisitions and capital investments while $2.5 billion went to shareholders in the form of dividends and share repurchases. Its largest acquisition in the past decade was its purchase of the El Jimador and Herradura tequila brands in 2007 for $776 million. While it did flirt with the idea of buying Allied Domecq in 2005 with Constellation Brands (NYSE:STZ), the $14 billion price tag proved too rich for all but Pernod Ricard. That's good news for shareholders.
Back in 2000, Brown-Forman operated two segments: wines & spirits and consumer durables. It sold luggage, crystal and fine china under several brands to go along with iconic Jack Daniels. Not only did this divide the company's focus, but it also affected profitability. While the spirits business delivered operating profits of 20% or more, the consumer durables segment came in at less than half. By 2007, the company had sold all of its non-core businesses to focus on alcoholic beverages. Most recently, it announced it was selling Fetzer and all of its other wine assets, except for super-premium Sonoma-Cutrer, to Vina Concha Y Toro (NYSE:VCO) for $238 million. It paid $91 million in August 1993. The divestiture gives it more cash for international expansion.
A decade ago, 78% of its revenues were in the United States. If this were the case today, business wouldn't be nearly as strong. Fortunately, management has undertaken an aggressive expansion into many of the emerging markets resulting in 14% compound annual revenue growth over the last decade compared to 7% for top markets like the U.S., U.K. and Canada. Today, it generates just 47% of its revenues in the U.S. and it looks like this will continue to drop as international operations continue to play a larger role in the business. In 2010, Jack Daniel's experienced double-digit depletions (shipments direct to retailers and from distributors to wholesalers and retailers) in Australia, Mexico, France, Germany, Russia, Poland and Turkey. While India's not on the list at present, I anticipate it will be at some point and the same goes for China.
This is the best part of the company in my opinion. While its competitors have been furiously buying up brands and pushing their businesses further into debt, Brown-Forman has been plodding along, living within its means and growing the business the best it could. While it's kept its net debt at less than one times EBITDA, three of its peers - Diageo, Pernod Ricard and Fortune Brands - average 3.8 times EBITDA. So although it hasn't grown revenues in a straight line, a look back on the decade just past indicates it's been successful more often than not. Debt, in my opinion, is a four-letter word.
Brown-Forman is trading near an all-time high. By most valuation metrics, it's not cheap. However, in the past 10 years, its three losing years averaged 6% while its seven winning years averaged 22.8%. It doesn't take a genius to know these are good odds. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. See How To Pick A Stock.)
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