Brown-Forman (BF.B) (BF.A) is a beverages company that continues to grow at a solid pace, and the growth outlook remains positive. Investors have to pay a premium price for the company’s shares though, which limits upside in the short term, thus I believe that shares of the company are primarily attractive for those with a long term view.
Brown-Forman’s first quarter results beat analyst expectations for the top line as well as for the bottom line:
Let’s take a closer look at how the company manages to generate such high earnings growth rates with revenues growing by single digits only:
Brown-Forman’s net sales (excluding excise taxes) were up nine percent, and gross earnings were up nine percent as well — the first factor that explains the company’s operating leverage is the pace of advertising spending and, more important, the pace of SG&A expenses: Those did not grow as fast as the company’s net sales (SG&A expenses actually were down year over year), which explains how the company’s operating income could jump 14% year over year.
Management is proud of its cost cutting efforts:
Brown-Forman’s net income grew by 24%, compared to a 14% operating income growth rate, which was primarily the result of a lower tax rate — since the company’s tax rate of 28% in the most recent quarter will likely not fall much further (except if we see a tax rate reform), investors will likely not benefit from that factor going forward, thus net earnings growth more in line with the company’s operating income growth seems realistic.
The company’s earnings per share growth rate is positively impacted by another factor though: