The Only Beer Stock That Could Realistically Triple Over The Medium Term

| About: Craft Brew (BREW)


Craft Breer is attractive because it has low debt and low capital spending per share relative to the cash flow it generates.

The company is slated to grow earnings per share at north of 20% annually due to leveraging its distributorships through Anheuser-Busch's independent vendors.

The company is not for everyone, as it pays no dividend and frequently reports losses in the first quarter.

Craft Brew (NASDAQ:BREW), trading at a price of slightly over $11 per share, is one of the few brewing companies left that offers a good deal to investors because it characteristically reports losses in the first quarter (deterring a strong subset of investors) while delivering earnings growth that tends to march forward.

For instance, last year, the company lost $0.09 in the first quarter before making money in the next three to report total profits of $0.10 per share for the year. This year, the company lost a penny per share in the first quarter but is still slated to report profits of $0.25 per share for the year on the whole. The uneven nature of Craft Brew's earnings, with heavy reliance on second and third quarter profits to offset the troubling results in the first quarter, is why the shares are sitting there at $11 per share despite cash flow that has grown at 14.0% annually over the past five years.

There are three things that should lead someone to find Craft Brew attractive:

First of all, the company seems poised for strong earnings per share growth, with analyst consensus calling for 23.5% annual growth. Why the lofty figure? Because the company distributes its craft beers through Anheuser-Busch's independent wholesalers, and this provides an opening for Craft Brew to get its new products to market in a highly efficient manner.

For instance, it runs four brewing operations: Redhook Ale, Widmer Brothers, Kona Brewing, and Omission Beer (as well as a cider division called Square Mile Cider), and was able to quickly release its "Craft Beer Explorer" variety pack to the market, thus quickly improving cash flow per share (that's why Craft Brew is slated to grow its cash flow per share from over $0.53 per share in 2013 to over $0.80 per share in 2014).

The second thing that makes Craft Brewing attractive to potential shareowners is that the company is able to grow its sales without requiring significant capital expenditures per share because it distributes its products through independent wholesalers.

You can see evidence of this in the growing sales per share figures over the past several years that have been possible with minimal capital spending per share. In 2011, Craft Brew generated $7.92 per share in sales while only spending $0.45 per share in capital spending. In 2012, the brewery sold $8.97 per share while only spending $0.48 per share. In 2013, it sold $9.44 per share while only spending $0.52 per share. This year, it is expected to sell over $10 per share while only spending $0.55 or $0.56 per share in capital spending.

The third reason why Craft Brew may be attractive is that it only carries $11 million in debt on its balance sheet, and only owes $500,000 in long-term interest on its debt. This is because it sells its craft beers through the Anheuser-Busch wholesalers (that are independent), relieving Craft Brew of the need to take on extensive debt and capital spending to make a distribution network of its own.

This stock is not for everyone-the company is not mature enough yet to pay a dividend, and because earnings are slated to grow at over 20% annually, it's not yet at a point where it would be wise to return cash to shareholders because the internal rate of growth is so high. Additionally, the stock does not report linear growth figures-you typically see first-quarter losses more than offset by significant sales gains in the third quarter, and some conservatively inclined investors may not appreciate the lack of profit consistency that is inherent in the Craft Brew business model.

On the whole, there is significant room for Craft Brew to triple its stock price over the coming five years, as shareholders stand to benefit from a company that is growing earnings at a clip north of 20% while the shares have fallen from a high of $18 to just over $11 now. If you can deal with the fact that the company makes most of its profits towards the tail end of the year and tends to report underwhelming sales figures in the first quarter, this stock could be a healthy addition to your portfolio.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.