1) Following up on my April 10 e-mail about spirits maker Brown-Forman (BF-B)...
Privately held alcoholic beverage company Sazerac is preparing to sweeten its earlier offer of $15 billion in cash and stock to acquire Brown-Forman. It will give 100% cash to investors if they wish, according to this New York Times article:
Its potential cash offer would also value the company at $15 billion, but sellers often prefer cash offers because they are easier to value...
Brown-Forman is already engaged in talks to merge with Pernod Ricard of France.
Any deal could reshape the alcohol industry, which is grappling with tariffs, supply chain challenges and overall declines in alcohol consumption.
Sazerac's offer amounts to $32 per share. In light of this cash offer and the presence of another deep-pocketed suitor, I'm surprised the stock is only around $29.
So is one of my readers, blogger Eden Bradfield, whom I quoted at length in my April 10 e-mail. He wrote about the Sazerac offer on his Substack yesterday:
... the ball's now in Pernod's court – I expect a counter-bid of ~$35/share. I still think $40/share is a more likely final bid given the quality of the company + BF's best-in-class [return on invested capital] (12%... and this is a bad year!).
The fact that you have two bidders just goes to show what a valuable asset BF is. As I've written before, the Browns have unique negotiating power... They can sit and watch their [two] suitors fight over 'em.
I think he's right that Brown-Forman will be acquired for $35 to $40 per share.
2) In Bradfield's Substack post yesterday, as well as on April 14 and April 15, he shares his fixation on the luxury goods sector.
I'll discuss his thoughts below. But first, let's take a look at how the sector has taken a beating recently due to the conflict in the Middle East, as three recent articles note...
On Thursday, the Wall Street Journal reported that several European luxury giants experienced sell-offs:
Luxury behemoth LVMH, Gucci owner Kering and Birkin bag maker Hermès International have all warned this week about the impact of the Iran war on big spending consumers in the Middle East.
Hermès shares dropped more than 8% Wednesday after the Parisian fashion house reported weaker-than-expected first-quarter sales growth. The fall was the stock's sharpest decline in almost a decade, according to FactSet data.
The downbeat update from Hermès sparked a selloff among Europe's purveyors of pricey jewelry, apparel and handbags, compounding negative headlines about the state of the sector this week from Kering and LVMH.
This WSJ Heard on the Street column highlights how there's now "rare value" in the sector:
Investors were already dumping the stocks over worries that ultradiscretionary purchases like Tiffany necklaces and Birkin handbags might be jettisoned by consumers once missiles started flying in the Middle East. But the panic could be going too far, especially for the strongest names in the sector...
The old axiom is to be greedy when others are fearful. Luxury stocks are a bet that greed won't be gone for long.
The column mentions four stocks in particular:
But a handful of luxury stocks have fallen so much that there is a case to buy the dip. Prada is trading at 12 times projected earnings – a record low for its time as a publicly listed company. Its average multiple since the brand's 2011 IPO is 28 times.
Brunello Cucinelli, the quiet-luxury brand favored by tech billionaires, had been hit by the sour mood across the sector. Even though the stock has risen in recent days after the company reported impressive 14% sales growth for the first quarter, it is still at a discount to where it usually trades.
Hermès and LVMH are trading 20% and 15% below their 10-year average price-earnings multiples, respectively. The two stocks have traditionally been treated as safe havens in lean times, so the size of the discounts is unusual.
Lastly, this article in yesterday's NYT echoes the same theme, highlighting how the Middle East has been a vital source of growth for luxury brands in recent years:
These businesses doubled down on the Gulf region, which accounts for a significant share of global wealth, by opening more stores and putting more money into their e-commerce operations.
Luxury brands such as Dior, Ferragamo and Moncler have invested in a deep retail network throughout the Middle East, operating stores in urban hubs such as Dubai and Abu Dhabi in the Emirates and in Doha, Qatar...
In the days after the U.S.-led war in Iran began in February, brands closed many of their stores across Gulf nations. Most have been reopened, but sales have fallen precipitously.
As a bargain-hunting penny-pincher who buys a lot of his clothes at Costco Wholesale (COST), this sector is totally foreign to me.
But as an investor, I can recognize strong global brands and mouth-watering economic characteristics.
Plus, I love nothing more than buying stocks of great companies when they've sold off due to short-term factors. So my team and I are going to do some digging in this sector.
3) Today, I'll start my deep dive on one of the companies Bradfield highlighted in his recent posts: U.K. spirits conglomerate Diageo (DEO)...
Diageo owns a wide portfolio of well-known brands – including Johnnie Walker, Crown Royal, J&B, Buchanan's, Smirnoff, Cîroc, Ketel One, Captain Morgan, Baileys, Don Julio, Casamigos, Tanqueray, and Guinness.
On November 13, 2024, I analyzed the company after the stock had been cut in half. Then on December 18, 2024, I revisited the stock and dug deeper into the financials.
The company had high margins, returns on equity, and free cash flows, but it hadn't grown much in the prior two decades. So I concluded that the stock's multiples at the time were "not low enough to interest me."
It was a good call, as the stock is down another 36% since then and now sits close to a 15-year low:
As a value investor, long-term stock charts like this are incredibly compelling.
And I'm intrigued by what Bradfield wrote last week about the steps Diageo's new CEO is taking to improve the business:
Diageo was subject to typical UK investor temper tantrums when "Drastic" Dave Lewis cut the dividend (a perfectly sane move, in my opinion). Since Drastic Dave has taken over at Diageo, he has committed to reducing debt, improving systems (many of their orders were still entered in manually) and sold non-core assets, including a cricket team.
It's worth noting that Diageo trades relatively cheaply, at 12x [forward] earnings, while Brown Forman – largely due to the Pernod/Sazerac takeover speculation (sorry, "merger of equals") trades at 18x...
As I've been ranting at you for a while now, I think Diageo is positioned to be [a] turnaround story under Drastic Dave – he did the same at Tesco, and Diageo has a portfolio of wonderful brands plus their 33% stake in Moët-Hennessy.
Tomorrow I'll take a look at Diageo's financials, so stay tuned...
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. We had a lovely dinner for my middle daughter Emily's 27th birthday on Thursday. And on Saturday, my buddy Andreas and I did a 33-mile bike ride in the Bronx, up to Pelham Bay Park and City Island. (Two weeks ago, we did a 60-mile ride through Queens and Brooklyn.) Here are some photos:
