3 Stocks To Take Advantage Of Craft Beer's Popularity

 |  Includes: BREW, SAM, TAP
by: Kapitall

This list provides a closer look at some of the biggest names in the American craft beer industry - companies selling popular brands such as Redhook Ale, Samuel Adams and Blue Moon

According to the Brewers Association, the entire US beer market as of 2012 was worth roughly $99 billion and grew by 1% over the previous year. This amounted to 200,028,520 barrels of beer (where 1 barrel = 31 US gallons).

As reported on Kapitall Wire, craft brewers made strong gains within the beer industry, growing 17 by dollars and 15% by volume, versus 15% by dollars and 13% by volume in 2011.

And the craft brewing market experiences healthy rates of openings and low rates of closures. According to the Brewers Association, 409 breweries opened and just 43 closed as of March 18, 2013. Overall in 2012 there were 2,347 craft breweries, microbreweries and brewpubs in operation.

Craft brewers are also expanding into foreign markets. 2012 saw an increase in export volume of craft beer of 72% over 2011, with an approximate value of $49.1 million.

The List

Technically, a craft brewer is any brewery producing 6 million barrels of beer or less per year, where an alcoholic beverage industry member (who is not a craft brewer) owns or controls less than 25% of the craft brewery.

The somewhat loose definition of a craft brewer means beers produced by certain well known and publicly traded names fall into the category, allowing the average investor to make a play in the craft beer market even if the stock they are buying is not a craft brew company itself.

The list below includes more detailed financial data for three big players in the craft brewery industry.

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

The demand for craft brews is on the rise - are these names poised to lead the trend? Use this list as a starting point for your own analysis.

1. Craft Brew Alliance, Inc. (NASDAQ:BREW): Produces craft-brewed beers. Brands include Redhook Ale Brewery, Widmer Brothers Brewing, Kona Brewing Co, Omission Beer.

  • Market cap at $140.50M, most recent closing price at $7.43.
  • P/E: 61.54, Forward P/E: 29.63
  • PEG: 3.08
  • Total Debt/Equity: 0.12
  • 52-Week High: -15.47%

BREW has produced great gains over the last month, but dropped about 50 cents on Thursday after reporting first quarter losses on slumping beer shipment. Chief executive Terry Michaelson reconfirmed expectations that revenues and earnings in 2013 would exceed 2012 levels. "The company said growth would be driven by stronger sales of Kona, Redhook and Omission brands, along with a new Redhook label called Game Changer and a new Square Mile cider. New packaging also is planned."

BREW has a higher than average projected earnings growth rate over the next 5 years (20.0%). This is higher than competitors such as ABV (projected EPS growth over next 5 years at 7.74%) and TAP (projected EPS growth over next 5 years at 4.80%).

Based on conventional valuation ratios, BREW looks cheap relative to industry peers. The stock's PEG ratio stands at 3.08, while its Price/Cash ratio stands at 30.2. Even on a Price to Free Cash Flow basis the stock looks cheap, with a ratio of 38.11, compared to FMX (P/FCF ratio at 47.86) and ABV (P/FCF ratio at 63).

At the end of 2012, BREW reported its brands would become available in European and Asian markets thanks to an exclusive distribution agreement with CraftCanTravel, the US market's first full service exporting company focusing on American craft beer. Distribution is currently taking place in countries including China, Hong Kong, Japan, Holland, Ireland and the United Kingdom.

2. Boston Beer Co. Inc. (NYSE:SAM): Produces and sells alcohol beverages primarily in the United States, Canada, Europe, Israel, the Caribbean, the Pacific Rim, and Mexico. Craft brands include Samuel Adams, with 50+ seasonal and small batch varieties.

  • Market cap at $1.87B, most recent closing price at $145.22.
  • P/E: 34.11, Forward P/E: 26.71
  • PEG: 3.41
  • Total Debt/Equity: 0
  • 52-Week High: -15.18%

When comparing valuation ratios to industry averages, SAM looks expensive. The stock's Price / Free Cash Flow ratio stands at 270.94, much higher than BREW (P/FCF ratio at 38.11), BUD (P/FCF ratio at 24.66) and TAP (P/FCF ratio at 17.13).

Short sellers think there's more downside to the stock, especially when comparing short float to industry averages. SAM short float stands at 18.78%, which is equivalent to 16.52 days of average trading volume. As an example, this is much higher than FMX (short float at 0.12%, representing 0.67 days of trading volume) and BUD (short float at 0.33%, representing 1.14 days of trading volume). Competitor BREW, while still lower, comes closer with a short float at 3.03%, equivalent to 10.35 days of average trading volume.

SAM has placed a large emphasis on seasonal brews, and The Motley Fool explains how their most recent earnings report demonstrated that this strategy is not always foolproof. Sales of the company's spring varieties fell below expectations, yet SAM has already moved on to summer ale, spending an additional $7.2M on advertising and selling.

Despite a downgrade from Credit Agricole on Thursday May 9, their target price of $170 (up from their previous target of $165) represents a 17% upside from current levels. Williams Capital also downgraded shares to market perform but increased targets from $130 to $150 (3.29% potential upside from most recent closing price). Meanwhile, USB did Boston Beer no favors when it increased their target price from $117 to $143, a -1.5% potential downside from recent closing price.

Looking beyond the traditional craft brewer:

Molson Coors Brewing Company (NYSE:TAP) is one of the world's largest brewers by volume, and does not fit the traditional model of a craft brewer. However, TAP clearly recognizes the great potential in controlling craft beer names, as reported by Bloomberg. TAP currently produces Blue Moon, a popular Belgian-style beer that has been expanded to include over a dozen different varieties. And the company created a division to help develop and acquire more craft brands, called Tenth & Blake Beer Co., which has recently had discussions with at least 20 craft brewers. As the company's well known Miller Lite label continues to lose market share, more craft beers may help give the stock a much needed boost.

3. Molson Coors Brewing Company: Distributes beer brands. Craft brands include Blue Moon and its varieties, Batch 19, Third Shift Amber Lager, Colorado Native.

  • Market cap at $9.03B, most recent closing price at $49.49.
  • P/E: 20.45, Forward P/E: 11.61
  • PEG: 4.26
  • Total Debt/Equity: 0.59
  • 52-Week High: -6.65%

TAP has recorded a weak performance over the last month, returning -1.23% since 4/8/13. The stock is falling behind companies like Compania Cervecerias Unidas S.A. and Anheuser-Busch InBev , which returned 1.82% and 0.78% respectively, during the same time period.

The company has reported disappointing earnings growth over the last year, with EPS falling by -32.84%, lower than industry peers such as SAM (EPS growth over the last year at -7.93%) and ABV (EPS growth over the last year at -13.49%). Yet VCO, BREW and FMX reported even lower rates, at -40.53%, -73.83% and -81.54% respectively.

And TAP has a lower than average projected earnings growth rate over the next 5 years (4.80%). This is significantly below analyst projections for FMX (projected EPS growth over next 5 years at 12.59%) and CCU (projected EPS growth over next 5 years at 10.90%).

On Wednesday, Zacks analysts wrote "Overall, we are encouraged with the company's strong brand portfolio, continuous innovation and cost-saving initiatives... However, the slow recovery of U.S. economy and uncertainties in Europe undermine Molson Coors' growth prospects and profitability." It gave the brewer a $53 target price and restated its neutral rating on the stock. Analysts at Nomura are more optimistic. They raised their target price from $55.00 to $61.00 in a research note to investors on Tuesday, April 9th. Goldman also increased target price to $63.00 per share from $47.00. This respectively represents 7.09%, 11.13% and 27.29% upside from the current prices.

*All accounting data sourced from Google Finance, EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Emily Smykal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.