Craft Brewers Alliance: An Attractive Beer Stock

| About: Craft Brew (BREW)

By Timothy Lutts

Ranking ninth by volume on the list of American brewers is Craft Brewers Alliance (HOOK), which trades on the Nasdaq.

The company’s roots go back to 1984, when Kurt and Robert Widmer founded Widmer Brothers Brewing Company in Portland, Oregon. Today Widmer produces at least a half-dozen classic American and European brews, from the light “Widmer Brothers Hefeweizen” to the dark “Pitch Black IPA.” Revenues last year were $146 million.

And the company is growing by acquiring. In 2008, Widmer merged with Redhook Ale Brewery of Seattle, adopting the name Craft Brewers Alliance. Redhook makes a half-dozen beers. And in 2010, the company acquired Kona Brewing, the largest craft brewer of Hawaii. Kona, too, makes a half-dozen beers.

Last year, 49% of revenues came from Widmer, 32% from Redhook, which has a second brewery in Portsmouth, New Hampshire (which I toured last month), and 19% from Kona.

But there’s a far bigger fish in the ocean, in the form of Anheuser-Busch (NYSE:BUD), which, recognizing the growth potential of craft brewers, took a stake in Widmer Brothers in 1997 and now owns 36% of Craft Brewers Alliance.

The two Widmer brothers still own 18% of the company, and continue to hold the reins. But there’s no question the company has growth on its mind, and there’s no question that Anheuser Busch’s excellent national distribution system, as well as the presence of two Budweiser suits on Craft Brewers Alliance’s board of directors, will help the craft brewer achieve it.

In the first quarter, revenues at the company grew 18% from last year to $32.3 million, while earnings were unchanged, at a penny a share. Analysts are expecting earnings of 15 cents this year, up from 10 cents last year, but there’s no consensus for next year ... and that’s just as well, as I think another acquisition is likely.

Judging from the chart, other investors are bullish, too. The stock has nearly doubled in the past year, from 5 to nearly 10, and the trend remains clearly up.

But there is one big caveat, and that concerns trading volume. Average daily trading volume in HOOK is just 42,000 shares a day; at a price of 10, that’s less than half a million dollars a day. That’s very light, and a definite reason to be careful with this.

Finally, there’s valuation. On a price-to-sales ratio, HOOK looks good. While BUD trades at 2.5 times revenues and SAM trades at 1.6 times revenues, HOOK is trading at just 1.2 times revenues. On the other hand, if you look at price-to-earnings, you come up with the opposite conclusion. But you can’t trust numbers blindly; you’ve got to know what’s behind the numbers. And I know HOOK’s earnings are temporarily depressed because it’s investing in the future.

HOOK is simply too thinly traded, but I did find it interesting – even attractive – in light of my findings about the beer industry. If I were investing in HOOK, I’d wait for a pullback of at least 10% before buying. I’d keep my commitment small, and I’d use a strict stop in case the stock – unlike the beer – disappoints.