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Brown-Forman Corporation (BF.B) is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 22.41, higher than the industry average of 16.31x and the S&P 500’s 22.61x. However, this premium valuation raises concerns about whether BF.B can meet these expectations, especially considering its low Value Score of D, which suggests that it may not be a strong value proposition at current levels.

Brown-Forman has underperformed, with shares down 6.2% in the past three months, trailing both its industry’s 3.7% decline and the broader Consumer Staples sector's 1.5% dip, while the S&P 500 saw an 11.9% gain. BF.B is also trading below its 50 and 200-day moving averages, indicating potential weakness in the stock's momentum.

Current Pressures on BF.B

Brown-Forman has been grappling with soft performance due to lower volumes across brands and regions, which have been a significant drag on its top and bottom lines. The company's first-quarter fiscal 2025 results highlighted these struggles, with both revenues and earnings falling short of expectations.

Brown-Forman's sales decline across various categories reflects several factors that impacted its overall performance in the first quarter of fiscal 2025. This decline was driven by lower volumes of Jack Daniel's Tennessee Whiskey, impacted by shipment timing issues in key markets such as the United States, UAE and U.K. Additionally, the strong U.S. dollar hurt sales in markets like Türkiye.

Weaker sales trends across geographic regions in the first quarter of fiscal 2025 also weighed on Brown-Forman's performance. This was due to the prior year’s more favorable shipment timings, influenced by inventory replenishment and the rollout of its pricing strategy. Currency impacts and the Finlandia divestiture added pressure, though higher Jack Daniel’s prices in Türkiye and increased Jack Daniel’s Tennessee Apple volumes in Brazil helped mitigate losses.

The company also saw reduced gross and operating profits influenced by variable input costs, elevated inventory levels and transition service agreements following the divestiture of brands like Finlandia and Sonoma-Cutrer.

Can Growth Initiatives Turn the Tide for BF.B

Brown-Forman's premiumization strategy has been a key focus, with the company successfully pivoting toward premium and super-premium brands over the years. The company has been strategically reshaping its portfolio over the last couple of decades to focus on premium and super-premium brands.

The company’s portfolio of premium and super-premium brands mainly includes the iconic Jack Daniel's and Woodford Reserve. Jack Daniel's and Coca-Cola RTD have been strong additions to the portfolio, which reflect progress on its commitment to premiumization of its portfolio. Also, the company has successfully integrated the two super-premium brands – Gin Mare and Diplomático, in the Rest of the Portfolio category.

Looking ahead, Brown-Forman is optimistic about fiscal 2025. Management projects a return to growth in organic net sales and organic operating income, supported by gains in international markets and normalizing inventory trends. The company’s confidence is bolstered by its strong portfolio, effective pricing strategy and ongoing global expansion across various regions.

For fiscal 2025, Brown-Forman anticipates organic net sales growth of 2-4% driven by strength in both emerging and developed international markets. Similarly, organic operating income is expected to grow by 2-4%. Gross margin improvements are also anticipated, supported by a favorable price mix and the continued evolution of Brown-Forman’s premium-focused portfolio.

Investment Opinion on BF.B

BF.B’s elevated valuation and recent underperformance relative to peers are concerning. The company is faced with lower volumes across brands and regions, which have impacted both top and bottom lines. However, the company's premiumization strategy and portfolio reshaping efforts highlight its potential for long-term growth. Current investors should retain their positions in BF.B stock, while new investors might wait for a more favorable entry point. Brown-Forman currently carries a Zacks Rank #3 (Hold).

Three Picks You Can’t Miss

We have highlighted three better-ranked stocks in the broader sector, namely Freshpet, Inc. FRPT, Vital Farms VITL and Coca-Cola Europacific Partners CCEP.

Freshpet, a pet food company, has a trailing four-quarter earnings surprise of 132.9%, on average. FRPT currently sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Freshpet’s current financial year sales and earnings indicates growth of 27.3% and 224.3%, respectively, from the prior-year reported level.

Vital Farms, which provides pasture-raised products, currently sports a Zacks Rank #2. VITL has a trailing four-quarter average earnings surprise of 82.5%.

The Zacks Consensus Estimate for Vital Farms’ current financial year sales and earnings indicates growth of 26.3% and 88.2%, respectively, from the prior-year reported level.

Coca-Cola Europacific Partners produces, distributes and sells a range of non-alcoholic ready-to-drink beverages. CCEP carries a Zacks Rank #2.

The consensus estimate for Coca-Cola Europacific Partners' current financial year’s earnings per share indicates growth of 6.5% from the year-ago reported figures. The consensus sales estimate suggests a year-over-year growth of 25%.

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