Craft Breweries To Possibly Wet Down Your Portfolio

Includes: BRBMF, BREW, SAM
by: Kyan Alexander

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

Craft brewing is becoming very popular because now it is possible for people to create recipes in their own homes. Now, for less than $100 anyone that wants to can get his or her own kit and attempt to brew the next best beer. I will look at three craft breweries out there and let you know if any of them will help you afford more beer.

First up is the Boston Beer Company (NYSE:SAM): Better known by its biggest brand, Samuel Adams, it is the largest of the companies with a market cap of $2.0B. Annual revenues have increased for the last five years. The most recent quarter's revenues were up about 10% year-over-year. Earnings per share, however, were down 8.9%. At the end of the most recent quarter, SAM had approx $32M in cash and less than $750k in long-term debt. Since March insiders have sold over $275k shares, with $137k of those being unplanned. I am guessing that the insiders realized it was a decent run up and wanted to take some profits for themselves. This is a bad sign because now people with more information than the market has thought the stock is higher than it should be. According to the first quarter press release on SAM's website, the reason for the decrease in EPS growth was because of increased advertising, promotional, and selling expense. There was also a decrease in the gross margin due to an increase in materials costs. We will have to wait and see in subsequent quarters if the increased spending is effective and if costs of materials go down. There was nothing exceptionally revealing in the conference call. The company affirmed end of year guidance. If you already own it, you could possibly hold it, or take some profits and look for better growth opportunities. I would not buy in here. I will re-evaluate in a quarter or two to see if the increased marketing spending is paying off with an increase in revenues.

Next up is the Craft Brew Alliance (NASDAQ:BREW): BREW only has a market cap of $144.5M. Annual revenues have increased since at least 2010, and last year increased 13.5% for the full-year 2012 over 2011. At the end of the most recent quarter, BREW reported $1.7M in cash but $12.4M in long-term debt. According to yahoo finance, insiders and 5% owners own 57% of the company, however. On the most recent conference call, the CEO reported that the loss for the quarter was internally expected due to the transitions that are ongoing. He also noted that BREW still expected to meet 2013 guidance. The two biggest expenses were an inventory management system and systems that better allow the company to manage its complex portfolio. BREW markets three main brands and one young brand. Widmer Brothers is the weakest of the three and BREW replaced the weakest beer this quarter. I hope that the new Alchemy Ale proves more successful than the Hefeweizen. The other two brands, Kona and Redhook, performed very well. The stock has been stuck in the $7 range since mid-March. I think management realized they were struggling and is making the right moves to put the company in the best possible position. I like what is going on here and think this is a definite buy that should easily hit analysts' projections at $10-$11 per share by the end of the year.

Last, we have Big Rock Brewery (OTCPK:BRBMF) (All $ amounts are in Canadian dollars): Big Rock has a market cap of $89.0M and is a Canadian company. According to its most recent 10Q, first quarter year-over-year sales were down 11.5%. The report notes that the company is focusing less on volume and more on profit. Operating profit increased 61% year-over-year. Big Rock appears to be going through some adjustments as well. It is refocusing sales efforts, discontinuing certain promotions, and shifting efforts to more profitable markets. It also saw cost of sales rise on lower volume sales due to labor and overhead items. This was about a 20% increase in selling expenses per hectoliter year-over-year. The company has over $3M cash versus only $1.1M of long-term debt. Of the four companies featured here, however, this is the only one paying a dividend. It paid about $1.2M in dividends for the quarter or $0.20 per share for a yield of about 5%. While I like the company, I think it is a bit risky at this point, given the adjustments that are just beginning. It is definitely one to watch if you are looking to get into the craft beer industry.

I am a craft beer lover myself. Sam Adams has come out with some new beers lately and I truly enjoy them. Their new hopology collection fills the recent craving of IPAs that seems to be sweeping the country. But, since it is the biggest craft brewer by a lot, it will also feel the largest impact of the new microbrews coming to market and taking away craft market share. I think SAM's shares will remain flat if not pull back a little. I would again caution entry at their current level, but might take a look if the pull back brought them closer to the $140/share mark. Big Rock is struggling and needs to make some assessments and adjustments before receiving consideration for investment. As I said, watching Big Rock for another quarter or two to see what strategy shifts are made could prove valuable. It is currently at an attractive price if management can come up with a strategy to pull the company out of its current slump. The best growth opportunity here in my mind is the Craft Brew Alliance. The company recognized issues and is taking action to shed poor performing lines and introduce new lines that will hopefully become top performers. I think the price here is just right and I'm going to set up a few limit buys to phase myself into a small position with BREW. If you decide to get in or are already in, keep an eye out for that Q2 call, because we should see signs that their marketing spend and possibly even the new Ale are having a positive impact to revenues.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BREW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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