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US. Two Craft-Beer Companies Shares, Only One ‘Buy’

The craft-beer industry, against steep odds, has been an amazing growth story.
Craft brewers, the marketing term for small and independent companies, saw barrel volume increase 11% and retail sales rise 12% last year, according to the Brewers Association. Overall U.S. beer sales slumped 1%. While the craft-brewing segment represents only 5% of the total beer market, it commands higher profit margins, making the potential for market-share gains almost inevitable.
Consumers have more beer options than ever, and they're picking quality over price. The consensus among beer aficionados is that the craft beers of today offer more taste and satisfaction than any of the big-brand manufacturers.
So how do investors capitalize on the craft-beer market? There are two publicly traded craft brewers: Boston Beer(SAM_) and Craft Brewers Alliance(HOOK_). The two companies are dwarfed by conglomerate beer makers Anheuser-Busch InBev(BUD_) and Molson-Coors(TAP_).
The majors are moving quickly to acquire specialty brewers wherever they can. Anheuser-Busch recently announced the acquisition of Goose Island Beer in Chicago for $39 million. More deals like this will be on tap. Molson-Coors last year announced the establishment of a new specialty division, Tenth and Blake, which features craft brands such as Blue Moon and Leinenkugel's.
Yet while more acquisitions are likely, many of the potential suitors such as the privately held Sierra Nevada, Magic Hat or Harpoon Brewery aren't available to investors. So let's take a look at the two publicly traded options -- Craft Brewers Alliance and Boston Beer -- to see if investors can still profit.
Craft Brewers Alliance: Brands include Redhook, Widmer Brothers and Kona Brewing Co. Craft Brewers Alliance was a 42% owner in Goose Island, for which it received $16.3 million from Anheuser-Busch InBev. Craft Brewers Alliance has deep relations with Anheuser-Busch InBev, which is centered on a third-party distribution agreement. Since Anheuser-Busch InBev also had a similar relationship with Goose Island, might there be the potential for another acquisition with Craft Brewers Alliance? At this point, the only potential suitor would be Anheuser-Busch InBev, which owns 32% of Craft Brewers Alliance, and is the sole distributor for all its brands.
Let's take a look at the numbers on the acquisition of Goose Island. The brewer, which produced 127,000 barrels of beer in 2010, was acquired for $39 million. This equates to $307 per barrel. If we take the 607,800 barrels produced by Craft Brewers Alliance in 2010, and using the same dollar/per barrel value, we arrive at a value of $186 million for Craft Brewers Alliance, a small premium (16%) to the current $160 million market value.
Since Craft Brewers Alliance has such a tight relationship with Anheuser-Busch InBev, it's highly unlikely that any other company besides Anheuser-Busch InBev would step in and make an offer for Craft Brewers Alliance. Aside from the distribution agreements, Anheuser-Busch InBev also has a solid presence on the board of Craft Brewers Alliance.
What benefits would Anheuser-Busch InBev get from acquiring the rest of Craft Brewers Alliance? Since the company is already getting paid for the distribution of Craft Brewers Alliance's brands, would it make sense to take more risk in assuming control of the rest of the company? With the acquisition of Goose Island, it's clear that Anheuser-Busch InBev is serious about getting into the craft business, but even a full acquisition of Craft Brewers Alliance wouldn't result in an enormous gain to shareholders.
TheStreet Ratings' quantitative ratings model gives Craft Brewers Alliance a '"hold." The model's main concern lies with the valuation of Craft Brewers Alliance, as the stock is currently trading at a trailing price-to-earnings ratio of of 55. Revenue rose 7% in 2010, not strongly enough to merit the current valuation. Overall, shares still look rich, as it appears that an acquisition has been priced into the stock. I'd avoid the stock for now.
Boston Beer: The company is widely credited with putting craft beers on the map. Boston Beer, the maker of Samuel Adams, is the only independent publicly traded craft brewer (with Craft Brewers Alliance 32%-owned by Anheuser-Busch InBev), and, in my opinion, offers better value.
While expectations call for only 6% to 7% revenue growth for 2012, Boston Beer is still by far the leader in the craft market, with a 22% share as of 2009 (according to Beer Marketer's Insights), substantially higher than the 8% share for No. 2 privately owned Sierra Nevada. Yet Boston Beer has no shortage of competitors, as emerging brands such as Dogfish Head have been at the forefront of the recent boom in the craft market.
Boston Beer has said it could top 10% growth this year without significant capacity expansion. The company should be able to benefit from continued growth in the craft beer market (or "better beer" category, as Boston Beer refers to it), as consumers will likely continue to buy brews of higher quality. In fact, according to a recent survey by Minit, "some 33% of all beer drinkers aged 21 and up are drinking less imported beer because they're drinking more domestic craft beer instead."
Boston Beer seems well-positioned, with 25 brews, ranging from the flagship Boston Lager, to more obscure offerings such as the "Barrel Room Collection," which are sold in a 750-ml bottle and finished off with a Champagne-style cork.
The company is trying to distance itself from the rest of the premium beer market. A new initiative, the "Freshest Beer Program," cuts the time and temperature the beer experiences waiting at wholesaler warehouses.
TheStreet Ratings' quantitative model has a "buy" rating and a $122 target on Boston Beer. The company scores best for growth (as evidenced by 43% growth in cash flows over two years), efficiency (most recent return on equity of 27%) and for financial strength (zero debt, $50 million in cash).
The stock has soared 75% over the past year, and at a trailing P/E of 26, the stock isn't cheap. However, with an investment in Boston Beer, you can buy into the growth of the craft beer market, while owning one of the premier brands in the beverage industry.

12 Apr. 2011

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