It’s time to buy spirits stock Brown-Forman , according to Morgan Stanley. Analyst Eric Serotta double upgraded shares to overweight from underweight. He also raised his price target to $75 from $66, implying 12% upside from Tuesday’s close. Morgan Stanley’s previous underweight call was based on limited visibility around gross margin recovery, the company’s full valuation and slower U.S. spirits industry growth. However, Serotta now expects meaningful upside for the stock. “With gross margins now turning from a headwind to a tailwind, and concerns over industry growth likely to dissipate, we expect the stock to appreciate as investors refocus on BFb’s robust LT +5-7% topline and +HSD OI growth profile,” the analyst wrote in a Wednesday note. Agave, which is used to produce tequila, has been a disproportionate headwind to the company’s general margins over the last several years, Serotta said. However, he added that there is now “significantly greater visibility around [gross margin] recovery over the next 12-24 months, with spot prices for agave down 25-50% over the past 3-6 months amid increased supply.” Serotta also said that, while the company’s absolute valuation is “rarely cheap,” its relative valuation appears compelling compared to its peers Monster Beverage and Constellation Brands . When comparing growth from a pre-Covid start of 2020, Brown-Forman has dipped 1% while other consumer packaged goods companies have gained more than 15%, according to Serotta. “We believe that Brown-Forman has a long runway to deliver 5-7% organic sales growth for many years to come, assuming 4-5% growth in the US (in line with the LT growth in the US distilled spirits category), 5- 7% growth in developed international markets through share gains, and DD% growth in emerging markets,” said Serotta. —CNBC’s Michael Bloom contributed to this report.
