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A Sobering Look at Brown-Forman

Thursday, 11 Mar 2010 | 7:48 PM ET

Brown-Forman’s most recent quarter wasn’t nearly as good as the headlines announced, Cramer said Thursday. The Mad Money host crunched the numbers, and now he wants investors to sell the stock.

“Especially with [it] just a point and half off its 52-week high,” Cramer said.

Check out the headline from the liquor maker’s press release: “Brown-Forman Grows Reported and Underlying Operating Income 10% and Increases EPS 8% for the First Nine Months of Fiscal 2010.” On top of this pronouncement, there’s also the fact that B-F , which counts Jack Daniels and Southern Comfort among its brands, beat Wall Street’s earnings estimates of 70 cents a share by a dime.

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But notice how attention has been shifted away from the quarter itself, drawing the reader toward completely unrelated metrics. That’s because B-F’s earnings per share dropped 10% in that period, while operating income slipped 2 percent. And the 10-cent earnings beat? That was the product of inventory shifts and currency translations, not increased sales.

In fact, B-F said that underlying sales inched up 2%, while at the same time depletions – the shipments that go direct to retailers or from distributors to wholesales and retailers – climbed 4%. If the company is moving 4% more liquor but revenues have increased only 2%, Cramer said, then prices must have declined 2%. This would make the third straight quarter of falling prices, even though the economy and the employment situation have stabilized, if not begun to recover.

That worried Cramer, as did the company’s attempt to gloss over what were in fact poor international sales. Management boasted of overseas depletions growing more than 50% and 20% for Gentlemen Jack and Jack Daniel’s, respectively, but those gains were off a small basis. And as Cramer pointed out, the rest of the company’s booze portfolio outside the States registered depletion losses of 3% for the quarter.

Speaking of glossing over, the biggest red flag came when CEO Paul Varga spent about a quarter of the conference call talking about B-F’s 10-year history. Not about the quarter, but his company’s great long-term results over the past decade. When that happens, Cramer said, it’s time to sell.

B-F’s problem is that consumers aren’t buying its premium and mid-shelf brands. Instead they’re reaching for the lower-priced well booze that makes morning-after headaches much more likely. And the company doesn’t seem confident that things are going to change. Not when it sets full-year guidance for EPS growth at between 4% and 7% after touting an 8% gain over the fiscal year’s first nine months.

The stock is up 9% in just the last month, and it’s added 49% since last year’s lows. Cramer thinks investors should feel lucky B-F isn’t down more after the quarter, and he told viewers to take the chance to get out now.

This $55 level is “a terrific price to exit” the stock, he said.

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