Bernstein downgrades Brown-Forman on margin pressure from higher whiskey costs

Investing.com -- Bernstein downgraded Brown‑Forman to Market-Perform from Outperform, citing rising costs tied to aging whiskey that are expected to pressure margins over the next two years.

The brokerage set a $29 price target and said the stock could trade sideways in the near term.

Analysts said the downgrade follows new details in the company’s recent earnings report indicating that the cost of barreled whiskey will weigh on profitability for longer than previously expected. The firm now forecasts about 105 basis points of gross margin compression annually in fiscal 2027 and 2028 as higher-cost barrels move through the inventory cycle.

That outlook led Bernstein to cut its earnings forecasts. The brokerage lowered its fiscal 2027 and 2028 earnings estimates by about 4.3% and 8.7%, respectively, and now expects little to no earnings growth in fiscal 2027 and about 4.5% growth in fiscal 2028.

The lower earnings outlook and higher uncertainty also prompted Bernstein to reduce its valuation multiple, lowering its target price by about 23%.

The brokerage said the downgrade is not tied to concerns about demand or industry pricing. Bernstein maintained its view that the debate over structural versus cyclical weakness in U.S. alcohol demand is not the main issue for the company.

Analysts said Jack Daniel’s, Brown-Forman’s flagship whiskey, and rival Jim Beam continue to post positive pricing in the U.S., while overall U.S. whiskey production has fallen roughly 27% from a year earlier, suggesting producers are adjusting supply.

Bernstein also said the company continues to gain share in the U.S. market and maintained its revenue forecasts largely unchanged.

Despite the downgrade, the brokerage said the stock still looks attractive on several cash metrics, including a roughly 6% free cash flow yield and a dividend yield of about 3%, supported by leverage of about 2 times net debt to EBITDA.

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