Brown-Forman’s Latest Partner Is a Big Reason to Own Shares

Brown-Forman (BF.B), the Lexington-based spirits, announced on June 13 that it was partnering with Coca-Cola (KO) to launch a Jack & Coke ready-to-drink (RTD) branded cocktail.    

Although the initial launch in late 2022 is in Mexico, the product will be available globally shortly after that. 

“Brown-Forman has been a leader in the ready-to-drink category since we launched our first Jack Daniel’s RTD more than 30 years ago. Coca‑Cola perfectly complements Jack Daniel’s and our existing RTD offerings, enabling us to accelerate expansion and continue to grow our business around the world.”

Given the S&P 500 entered bear market territory on June 13, stock selection has become even more critical to investors. Brown-Forman and Coca-Cola partnering at this time is a smart move that should reap dividends for the shareholders of both companies in the coming years. 

Here’s why I like Brown-Forman.

Coca-Cola Continues to Dip Its Toes in Alcohol 

The tie-up between Jack Daniels and Coke should have happened years ago. Unfortunately, until current Coca-Cola CEO James Quincey pushed the company into alcoholic drinks in 2018 by launching Lemon-Dou in Japan, a partnership wasn’t going to happen.

As part of the Brown-Forman announcement, Coca-Cola put out a press release about its emerging business in alcohol. 

“Jack Daniel’s & Coca-Cola joins a portfolio of flavored alcohol beverages that uses company brands, including Lemon-Dou, which is currently available in Japan, China, and the Philippines; Topo Chico Hard Seltzer, available in more than 20 markets; Schweppes Pre-Mixed Cocktails, currently available in Brazil; and the new Simply Spiked Lemonade and Fresca Mixed in the United States,” Coca-Cola’s June 13 press release stated. 

The flavored alcohol beverage (FAB) segment remains a work in progress for Coca-Cola, so a tie-up with Brown-Forman, who’ve been participating in this business for more than 30 years, is a win/win for both companies. 

For Brown-Forman, I could see it doing more of these for some of its other products and brands. In Q3 2022, its RTD business increased sales by 6% over Q3 2021. However, compared to the sales of virtually every other category, it appears as though the RTD category needed a pick-me-up. 

Coca-Cola will do just that.     

It’s More Than Jack Daniels 

There is no question that Jack Daniels remains a big part of Brown-Forman’s business. 

In fiscal 2022, JD family of brands sales grew by 17% year-over-year, excluding foreign exchange and acquisitions. Through the first nine months of fiscal 2022, the company’s whiskey revenue -- much of it from the Jack Daniels family of brands, including RTD -- accounted for 79% of its total sales.  

As JD goes, so goes the company. 

However, when it comes to nine-liter depletions -- a standard case is 12 750 ml bottles -- there are other significant contributors. In 2022, non-whiskey products contributed 15.8 million nine-liter cases to overall depletions of 47.1 million. 

For example, its el Jimador and Herradura tequilas increased nine-liter depletions by 25% and 27%, respectively, in 2022. Vodka's nine-liter depletions increased by 12% in the past fiscal year.  

I could see it partnering its Finlandia Vodka brand with Seven-Up or Sprite. As for tequila, a partnership with San Pellegrino to make an RTD Paloma cocktail would make sense. The list goes on. 

That said, the company’s been relatively conservative regarding non-whiskey-related acquisitions in recent years. Its last purchase was in October 2020. It acquired the New Zealand RTD brand Part Time Rangers. It paid just $14 million. In 2019, it acquired Fords Gin for $22 million. 

The Coca-Cola partnership will put more zip in its revenues than either of these targeted acquisitions. With interest rates increasing, it’s unlikely to make any big moves. Organic sales will be critical to its future growth.

The Bottom Line

In fiscal 2022, Brown-Forman’s free cash flow was $798 million, 6% higher than a year earlier. By 2025, it’s projected to reach $1.15 billion. Trading at 8.3x sales, it’s not a cheap stock. It’s more expensive than virtually every one of its U.S.-listed peers. 

So, why buy its stock?

Over the long haul, whether we’re talking five years or 20 years, it’s outperformed most of its competitors in alcoholic beverages. A big reason for that is the ongoing involvement of the Brown family, who control more than 50% of the votes and economic interest in the company. 

They’re in this for the long haul providing stability to management and the board when making strategic decisions. Permanent capital is a good thing.

Brown-Forman is an excellent stock to own in this market to ride out the volatility. It might not be high growth, but it’s growth you can count on. 

The Coca-Cola partnership is another fundamental reason investors should consider owning Brown-Forman.