Since the beginning of July, multiple members of the Brown family have been indirectly purchasing shares of Brown-Forman Corporation (NYSE:BF.A). Our analysis of studies on insider trading has led us to conclude that stocks bought by multiple insiders tend to outperform the market on average, and this finding makes sense to us since insiders already have an economic connection to the company and so unless they have particular confidence in the stock price it is rational for them to diversify rather than buy more shares. Of course, investors can’t mimic every insider purchase, but we think that stocks bought by insiders can be treated similarly to the results of a stock screen in that investors can take a brief look at companies involved and decide whether or not they are worthy of further research.
Brown-Forman, the alcoholic beverage company whose brands include Jack Daniels and Southern Comfort, had its fiscal year end in April 2013. Revenue increased by 5% compared to the previous fiscal year, and costs were held in check enough that earnings grew 15%; both sales and net income were up close to 10% in fiscal Q4 versus a year earlier, so there doesn’t seem to be a real downward trend in financial performance. Sales growth was actually slightly higher in Europe, Brown-Forman Corporation (NYSE:BF.A)’s second largest market, than in the United States. At its current market capitalization of $15 billion, the stock trades at 26 times trailing earnings; even with the good growth numbers in recent reports, that valuation actually seems a bit high to us. Wall Street analysts expect some continued improvement in earnings next year and so the forward P/E is 22.
Other alcoholic beverage companies include Diageo plc (ADR) (NYSE:DEO), BEAM Inc (NYSE:BEAM), Constellation Brands, Inc. (NYSE:STZ), and Anheuser-Busch InBev NV (ADR) (NYSE:BUD). Of these four stocks, the two giants- Diageo and Anheuser-Bush- trade at something of a discount to Brown-Forman Corporation (NYSE:BF.A) with trailing earnings multiples in the 19-20 range. Interestingly, each of these companies is coming off a significant increase in net income in their most recent quarter compared to the same period in the previous fiscal year though their revenue numbers were significantly lower. We don’t think that they can sustain high growth on margin improvements alone, and that they still need to do well in order to justify their current valuation. Constellation has risen over 80% in the last year, resulting in its premium pricing, but analysts expect the company’s efficiency to improve next year with the result being that its valuation represents a forward P/E of 15. Beam has been experiencing good growth on both top and bottom lines; though much of its earnings growth has been through margins, revenue has been doing nicely as well. However, as with Brown-Forman the market is assigning a fairly aggressive valuation to the stock and so we’re not sure that it’s a good value.
Investors are perhaps more optimistic about alcoholic beverage companies in general than their recent performance merits. Earnings growth has generally been strong, but at some companies revenue numbers have been much weaker leading us to be skeptical that these businesses can continue to do well. Beam and Brown-Forman have at least been achieving moderate revenue growth, but those stocks are quite expensive in trailing earnings terms and so even with the insider buying at Brown-Forman Corporation (NYSE:BF.A) we aren’t sure either is a good value.
Disclosure: I own no shares of any stocks mentioned in this article.
