by Travis Johnson, Stock Gumshoe | September 8, 2010 1:34 pm
Well, yesterday I wrote quite a bit about tobacco — so today, though my time is a bit short (getting the kiddos prepped for school is shortening the work week a bit), I thought I’d look into a sin stock sector that I like a lot more: alcohol.
And the one that tickled my taste buds this morning when I started searching out a booze stock was a teaser from our old friend Nancy Zambell.
Here’s how she pitched this one in a teaser for her Buried Treasure Under $10 newsletter:
“This next buried treasure is a ‘micro’ in more ways than one. First it is a tiny microcap company with a market cap of right around $100 million. And it is a small beer brewer and distributor, commonly called a microbrewer.
“You see, with consolidation, the U.S. beer market is dominated by two players, Anheuser-Busch InBev and MillerCoors.
“Then come some small, but well-established players with strong local and regional loyalties.
“Our buried treasure controls a handful of very tasty brands and is now the eighth-largest domestic brewer. Here are two reasons you should be picking up some shares along with your six-pack:
“This company is on the fast growth track, averaging around 50% revenue growth annually over the past three years. During a period when many, many companies are consolidating operations and laying off workers, here is a company that is growing both sales and profits at a rapid pace
“This company is a prime takeover candidate. It has already caught the eye of one of the big boys, which has now accumulated a good chunk of shares. Are they planning a run at a complete takeover? We can’t know for sure, but it wouldn’t surprise me one bit.
“So we can win two ways with this company, either through steady appreciation giving us 50%-100% gains over the next 6-12 months, or in one quick shot through an acquisition that is already teed up.”
Sounds pretty tasty, eh? So which stock is this?
Well, it’s not the one craft brewer that most investors have heard of, that would be Boston Beer (SAM), brewer of Sam Adams, the first real breakthrough microbrew … after all, Boston Beer is a big guy and an investor favorite now, they’re on the verge of being a billion dollar company, which makes me think of them as a bit more “macro” than “micro.”
No, the solution to Zambell’s tease is the next generation upstart, a little company from the other coast called Craft Brewers Alliance (HOOK), formerly known as Redhook Ale Brewery. Actually, Redhook has been around for as long as Sam Adams, maybe longer, but never got quite the marketing push and distribution that Jim Koch engineered for his Boston beer. They renamed themselves Craft Brewers a couple years ago, pulling other breweries into their universe (Oregon’s Widmer Brothers and their famous Hefeweizen, Goose Island from Chicago, and most recently Kona Brewing from Hawaii), and the company now brews beer in several places and does both wholesale beer selling nationwide and operates brewpub-type restaurants.
Which is making me both hungry and thirsty.
The stock is a darling of small cap momentum junkies these days, with a market cap of just over $100 million and a stock price that’s set a few new 52-week highs over the last month. Still, it’s a low-margin business so you certainly wouldn’t want to pay a trailing 60X earnings for a company like this unless you were sure they were going to put together some substantial revenue (and hopefully earnings) growth in the years go come.
Some of that growth will probably come, at least — HOOK has a distribution agreement with Anheuser Busch, an agreement that was sweetened a bit recently when BUD cut their fee, so they at least have the potential of being in every convenience store in the country if the Budweiser folks make that a prioirty … but it does seem that the recent enthusiasm behind the shares must be largely based on the potential for making that distribution agreement more permanent by way of a little corporate marriage.
I don’t know if that’s likely or not — I’m sure the Inbev folks could buy them if they wanted to, though they also get a fair amount of the benefit by just distributing their beers. They do, according to reports I’ve seen, already own a small piece of HOOK, though that’s not reflected in the institutional holdings listed on most of the finance portals and I haven’t double checked with the SEC filings.
I’ll take a nice frostly glass of whatever they want to brew for me (love that Widmer Hefeweizen), but am not personally so excited about their shares at this price — seems like too much of a takeover speculation, which means that if the takeover doesn’t materialize as rumored, the stock could easily tumble. I’ll accept that microbrews are the only real area of growth for US beer sales, and that they’re cannibalizing sales, slowly, from folks like Inbev and Molson Coors, but I don’t know if that brings the kind of growth that justifies this price.
And with Latin America and Asia being the source of much of the growth in beer consumption, I’d probably look to an international player if I were to invest in beer at this point, rather than a company in the mature US market — there’s something to be said for buying a stock with a growing market, rather than one that’s really just trying to take market share from other competitors.
So what do you think? Interested in the eighth-biggest brewer in the US at 60X trailing earnings? Or would you prefer a genuine international macro-brew monster like BUD at 20X earnings, with less growth ahead, or a somewhat bigger “craft” brewer like Boston Beer, which trades at 24X trailing earnings (and 20X forward earnings)? Something else? Let us know with a comment below.
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