Declining Consumption And Regulation Will Squeeze Spirits Margins

Key Takeaways

• Growing health awareness, regulatory pressures, and higher competition are expected to reduce alcohol demand and compress margins for Brown-Forman.
  
• Heavy dependence on core brands and limited emerging market reach increases revenue risk and limits potential for future global growth.
  
• Focus on premium brand expansion, emerging market growth, digital innovation, and sustainability initiatives positions Brown-Forman for revenue diversification, margin expansion, and long-term earnings growth.

Catalysts

Manufactures, distills, bottles, imports, exports, markets, and sells a variety of alcohol beverages.

• Ongoing shifts in consumer preferences due to rising health consciousness and increased moderation, particularly among younger demographics, are expected to drive sustained declines in alcohol consumption, directly pressuring Brown-Forman's long-term revenue growth and limiting category expansion potential globally.
  
• Intensifying global regulatory scrutiny and the probability of further tax increases on alcoholic beverages will likely drive persistent cost inflation, create market access barriers, and reduce consumption, resulting in ongoing margin compression and greater earnings volatility for Brown-Forman.
  
• Continued heavy reliance on a small set of core brands, most notably Jack Daniel's, increases concentration risk and leaves Brown-Forman exposed to material volume declines or heightened competition, which could directly threaten revenue stability and earnings resilience over time.
  
• Brown-Forman's limited penetration in high-growth emerging markets compared to international peers, and its heavy revenue dependency on mature, stagnating U.S. and Western European markets, suggest a lack of sufficient diversification. This positioning risks future net margin stagnation as global spirits demand migrates toward markets where Brown-Forman's presence is weaker.
  
• Rising competition from both global players and agile craft distilleries, along with non-alcoholic alternatives increasingly capturing shelf space, threaten Brown-Forman's pricing power and market share, putting further downward pressure on both top-line growth and operating margins for the foreseeable future.

Brown-Forman Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Brown-Forman compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Brown-Forman's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 21.4% today to 20.7% in 3 years time.
• The bearish analysts expect earnings to reach $831.9 million (and earnings per share of $1.78) by about September 2028, down from $844.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 15.8x today. This future PE is lower than the current PE for the US Beverage industry at 25.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Brown-Forman Future Earnings Per Share Growth

Risks

• The strong premiumization trend in consumer spirits globally, coupled with Brown-Forman's continued focus on expanding its super-premium whiskey and tequila portfolios and successful recent innovation (such as the launch of Jack Daniel's Tennessee Blackberry), suggests the company is positioned to capture higher price points and margin expansion, which could lift future revenues and earnings.
  
• Robust growth in emerging markets such as Brazil and Mexico, where organic net sales grew by 30% and 22% respectively, demonstrates Brown-Forman's ability to tap into the expanding middle class and urban populations, potentially driving sustained top-line growth and improved geographic diversification.
  
• Ongoing strategic international expansion initiatives, including increased investment and resource allocation toward high-growth regions like India and Asia, present opportunities for Brown-Forman to diversify its revenue streams beyond mature US and European markets, supporting longer-term revenue and profit growth.
  
• Effective digital transformation and e-commerce enablement-evidenced by new direct-to-consumer strategies and enhanced brand engagement-may unlock incremental revenue channels and operating efficiencies, supporting gross margins and earnings growth over time.
  
• Investment in sustainable production practices, operational streamlining, and the transition to new distributor relationships in the US (with increased headcount and improved margin structures) may drive operational efficiencies, brand equity, and net margin resilience, further contradicting expectations of long-term earnings decline.

Valuation

• The assumed bearish price target for Brown-Forman is $25.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Brown-Forman's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.0 billion, earnings will come to $831.9 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $28.2, the bearish analyst price target of $25.0 is 12.8% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.