My investing strategy centres around 1) buying shares in companies that own high quality businesses or assets and 2) holding them for the long term. I hope to obtain an edge by buying into these shares at unreasonably good prices. Usually because other investors are freaking out about something.

With this in mind, I decided to take a fresh look at Brown Forman (NYS: BF.B). Brown Forman is the spirits company behind Jack Daniels and other brands of American whiskey including Old Forester and Woodford Reserve. It also owns Chambord, tequila brands, Diplomatico rum, and some other assets.

For context, here is how Brown Forman’s market capitalisation has collapsed in recent years:

brown-forman-market-cap

Figure 1: Brown Forman market cap over time. Source: Pitchbook data

Perhaps the biggest culprit here has been multiple compression, as seen in the price-to-earnings investors have been willing to pay for the shares:

brown-forman-pe-ratio

Brown Forman isn’t the only consumer goods company – many of which were labelled as ‘bond proxies’ in the era of zero interest rates – to have its P/E ratio whacked after rates have risen. Look no further than Nestle for another example.

However, there also appears to be a lot of uncertainty about what revenue and profit growth might look like for spirits (and alcohol companies more generally) going forward. And it appears to be coming from several different angles.

The ‘sober curious’ youth of today

A report published by Berenberg Research claimed that members of GenZ, those born after 1997, are consuming 20% less alcohol than the Millennials born between 1981 and 1996.

What I am about to say is highly anecdotal, but this doesn't seem farfetched. An outsized percentage of people I know in this age range (mostly from my cricket and soccer clubs) seem to drink with more moderation or not at all.

Potential impact of GLP-1s

This is still at an early stage, but studies have suggested some potential for weight loss/GLP-1 drugs to curb problem drinkers’ desire to consume alcohol. As a large percentage of overall alcohol sales are made to a small percentage of drinkers, any progress here could have an outsized impact on sales.

Cannabis’s increasing legality in North America

A study by Carnegie Mellon showed that in 2022, more Americans reported using cannabis daily or near daily than they did alcohol for the first time.

Cannabis is not a pure substitute for alcohol, especially in more social contexts. But I could see why increased marijuana usage could hit alcohol sales. By most accounts, cannabis doesn’t mix too well with alcohol and doesn’t have the associated hangover.

Could cannabis one day compete with a dram or glass of wine as the go-to way to ‘take the edge off’ after work? It doesn't seem out of the question.

And if that wasn’t enough… tariffs

Brown Forman makes 55% of its sales outside the US. It is the dominant leader in American whiskey in most of these countries. Retaliatory tariffs on US products amid the current policy environment would not be a trivial matter for the company, you would imagine.

Enter the counter-narrative

I’ve just given you four reasons to be uncertain about the outlook for Brown Forman’s profits and for alcohol demand more generally. Now let’s look at counter-narratives for each.

Sober curious youth

First of all, who is to say this generation’s current preference for drinking less – if it is even a thing – will persist as the cohort gets older?

For Brown Forman’s part, they are trying to reach younger legal age drinkers through popular categories like ready-to-drink products (RTDs). Brown Forman’s Jack & Coke collab has been a big hit here, and seems like a good way to introduce new consumers from younger cohorts to the brand.

In its latest annual report, Brown Forman claims that 80% of their Jack & Coke shoppers in fiscal 2024 were new to the Jack Daniels brand:

jack-daniels-coke

While we are on the topic of RTDs, the perks of being Coke's whiskey play in this category shouldn’t be overlooked. You can learn more about why in this article I wrote on the rise of Monster Energy.

GLP-1s and cannabis

Our Brown Forman analyst Dan Su isn’t overly concerned about the impact of GLP-1s and cannabis use on demand for spirits.

She says there is still limited data on both and notes that the consumption occasion for alcohol versus cannabis is often very different. On GLP-1s, she thinks that beer could be more at risk due to the volumes consumed but will need to see more data.

Weaker demand in volume terms might not even be that big a deal. That is if people continue to drink “less but better”. This trend, which Su says has been visible for over a decade and was not just “a Covid thing” involves consumers trading up from beer to spirits but also trading up within spirits.

Jack Daniels’ core product is rather mass-market. But some of its special Jack releases, as well as its Woodford Reserve brand, scotch and rum brands are far higher up the price ladder and could stand to benefit from this trend.

Tariffs

This isn’t exactly an area where Brown Forman lacks experience. For one, its products have already been tariffed heavily in Europe in recent times. And let’s not forget: Brown Forman’s original Old Forester brand made it through prohibition in the US. 

Another thing worth mentioning about Brown Forman, especially in regards to it making it through periods of heightened uncertainty, is its ownership and management. The company is still controlled by the founding Brown family, which controls more than half of the voting rights.

Su feels that rather than posing a problem to outside shareholders, the family’s incessant long-term focus makes it a notable positive.

“While some investors might be apprehensive of conflicts of interest between family owners and minority shareholders, we haven’t seen evidence of this so far” her research on the shares says. “Moreover, the firm has consistently delivered strong cash flows and excess investment returns”.

I don’t know about you, but the presence of the same owning family that guided the company through prohibition – and has done a fairly good job of protecting and growing the company’s value in the generations since – doesn’t seem like a negative.

The power of Jack

At a time where all of the sentiment towards Brown Forman seems to be negative, there is another potential positive to consider: the power of Brown Forman’s flagship brand.

Jack Daniels remains one of, if not the, strongest spirits brand in the developed world. This intangible asset underpins our Wide Moat rating for the shares as it unlocks elements of pricing power and has brought about sticky customer relationships. Bar owners pretty much need to stock Jack.

Dan Su is certainly optimistic on the firm’s prospects and expects more than 5% annual sales growth over the next decade, driven by spirits volume expansion and higher average prices per bottle.

She expects the dominant American whisky segment to lead this, with help from Brown Forman’s smaller RTD and tequila segments and, longer term, the acquired premium rum, gin and scotch brands.

For context, here is a breakdown of Brown Forman’s revenue by product category. Note that the company sold a significant portion of their wine business in 2024 in exchange for shares in the acquiring company that was later sold to private equity.

brown-forman-revenue-split

All in all, Su’s Fair Value estimate of $55 per share suggests that recent prices of closer to $30 per share offered considerable value to long-term investors. Brown Forman shares currently have a five-star Morningstar rating.

Closing thoughts

I find some of the arguments for lower alcohol consumption quite compelling. But could investors be overestimating the likelihood of things like GLP-1s, cannabis and more health-conscious younger generations to dent consumption – and most importantly - profits?

I’d be interested in understanding more about how these factors could be offset by 1) a growing and ever richer population in the developing world and 2) ‘less but better’ drinking benefitting well-positioned companies in the industry.

Overall, you are paying around 15 times earnings for a company with fantastic brands and a long record of success. For that price, you also get a controlling family shareholder that appears to have done a decent job of maintaining and growing the company’s value over many decades.

There is certainly a lot of uncertainty in the air but you don’t need to look too far to find potential silver linings. Could this spell an opportunity? I haven’t taken the plunge yet, but I continue to see it as an interesting situation worth monitoring.

Whatever your opinion, don’t forget that individual shares should only be considered as part of a broader investing strategy. Here is a guide to defining yours.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.