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Most recently, investors were concerned about the limited historical clarity regarding gross margin improvement for the spirit and winemaker. There were also apprehensions regarding the deceleration in growth within the US spirits industry. However, as gross margins shift from headwind to tailwind, and worries about industry growth are expected to fade, Morgan Stanley anticipates an increase in the stock’s value.
“We now have significantly greater visibility around GM recovery over the next 12-24 months, with spot prices for agave down 25-50% over the past 3-6 months amid increased supply,” the analysts wrote in a note.
Agave has posed a significant challenge to Brown-Forman’s gross margins in recent years, and the recent reduction in agave costs is expected to significantly boost gross margins compared to market expectations. This development is anticipated to help close the gap until the decreased input costs for aged whiskey are reflected in the COGS.
While tequila accounts for only ~5% of Brown-Forman’s volumes, agave has been a disproportionate drag on the company’s gross margins, with agave prices surging from roughly M$15/kg in 2017 to M$27/kg last year, and each liter of tequila requiring 5-6 kg of agave.
The price has since fallen 25-50% to the M$15-22/kg range amid surging supply.
As a result, Morgan Stanley raised their 2025 earnings estimate by 3% to $2.33, ahead of the street’s consensus estimate of $2.25.
Although the analysts do not expect the company to benefit from the lower prices immediately, they estimate that a M$13-17/kg decline in the company’s average third-party agave costs would boost margins by 100-140 bps and EPS by 4.5-6.0% over time.
Brown-Forman reports 1Q23 results on August 30. Morgan Stanley forecasts 1Q EPS of $0.54, slightly ahead of the $0.53 consensus. They forecast F1Q organic sales growth of +4.0% compared to a +3.6% consensus.
The analysts expect Brown-Forman to reiterate its FY24 guidance for 5-7% organic net sales Growth and 6-8% organic operating income growth.
Shares of BF-B are up 2.68% in mid-day trading Wednesday.
