Smooth Sippin' -- Brown-Forman's Secret Recipe - TheStreet

If ever there was a brown paper bag stock, boring old

Brown-Forman

(BFB)

is it.

The Louisville, Ky.-based company -- best known for

Jack Daniels

whiskey,

Fetzer

wine and

Lenox

china -- has barely missed a step during the market's recent turmoil. BF has never been a spectacular stock performer -- it often underperforms the

S&P 500

in a strong market. But in the past five years, the shares are up 125% versus the S&P's 104% return. Ditto for the past 10 years, and 15 years, too. And when the S&P headed down in August, Brown-Foreman has remained as smooth as their famous Tennessee sippin' whiskey.

Contrast that with the wild ride of

Beringer

(BERW)

-- whose shares have plummeted from over 55 last October to the mid-30s recently. Or the depressing downhill skid that

Mondavi

(MOND)

has seen, hitting its all-time high of more than 56 in late October last year, only to subsequently crash and burn to the low 20s.

In fact, Brown-Forman is the only wine, spirits and/or luxury goods company to show a consistently positive trend in its stock price during the past 24 months. So why doesn't BF get any respect?

Blame the wine analysts, whose gushing reports keep the trendy money chasing higher-profile outfits like Beringer and Mondavi while Brown-Forman just keeps plodding along. It's conservative, family-dominated management structure focuses on the long term while the others are just trying to make their next quarter. That won't set any pulses racing: 1998 sales (for the fiscal year ended April 30) were up only 5% over 1997, gross profit was up 8% and operating income was up 7%.

But whereas Asia's economic

seppuku

disemboweled the earnings of both

Seagram

(VO) - Get Report

and

LVMH

, BF is reporting increased sales in Japan and in other export markets. Jack Daniels and

Early Times

are the No. 1 and 2 selling imported whiskeys in Japan, and the company says Japanese demand is increasing for its wines as well. On the other hand, the fact that more than 30% of BF's $1.1 billion in wine and spirits sales are international should probably be viewed as a yellow flag until the world financial markets sort themselves out.

"They're definitely a safe haven in a rocky market," says Caroline Levy, beverage analyst at

Schroder & Co.

, a calm voice among the wine and liquor company analysts. (See my Sept. 27 column,

Are Wine Analysts Sampling Too Much Product?). Levy points out that BF is generating free cash at the rate of about 5% of its market cap per year, which she believes could result in a war chest of some $850 million over the next five years. In addition, BF has a current ratio of 2.2 and a net-debt-to-capital ratio of less than 10%. That meant BF paid only $14 million in interest expenses, in contrast with Beringer ($23 million) and Mondavi ($12 million), each of which have about one-fifth of BF's annual revenue.

Lots of cash and very little debt is a warm comfort in a shaky market. But even at a conservatively managed company like BF, cash can burn a hole in the corporate pockets. That's why many think that Brown-Forman may buy a gin or vodka brand from somebody like

Diageo

(

(DEO) - Get Report

DEO ADR) or a wine property in the $100 or $200 million range. That's in the neighborhood of what it paid for Fetzer back in 1992, in what has proven an unusually timely investment.

In California, there is a score of likely prospects in this price range, including

Korbel

(which BF distributes but doesn't own) and

C. Mondavi/Charles Krug

. Or BF could possibly acquire the

Wine Alliance

from

Allied-Domecq

(

(ALDCY)

ALDCY ADR). But if the prices are too high, it will most likely continue a stock buyback program until the right property or brand comes along.

As the past couple of years has shown, even some pretty flaky companies can make money in a bull market. But as BF has shown, when the weather turns bad and the bears start mauling the high-priced glamour stocks, a little bit of boring can be just the thing for a good night's sleep.

Lewis Perdue is the editor and publisher of

Wine Investment News

, a comprehensive site offering breaking news and analysis of the 22 publicly traded wine and liquor companies, and private wine partnerships. He can be reached at

lperdue@ideaworx.com.