Craft Brew Alliance (BREW) brews and distributes its beer nationwide, and it is growing in popularity. The US beer market was about $96 billion in 2011 which is down 1% from 2010. However, BREW beer net sales grew by 13.3% which shows that it's successfully taking market share. BREW is heavily investing in growth.
BREW owns three brands. All three brands are creative with their beer making. They are always mixing and making new beers and even have their own seasonal beers that are only available during their respective seasons. The company has a total of five brew-pub restaurants that give the company customer awareness which contributes to research and development. Through these restaurants, the company can keep in touch with customers which creates a sense of brand loyalty. The company can also serve test-batches in the restaurants to see what the customers like. When brew customers show a liking for a new beer, the company can then decide to release it on a national level.
BREW's three brands are:
Redhook Ale Brewery in Seattle, WA
I have a friend who plays in a band and travels all around the Northeastern United States. He says he has noticed Redhook is a popular beer among hipsters. Here is an article that says the same thing. Redhook has a dark beer that veteran beer drinkers really like.
Widmer Brothers Brewing in Portland, OR
The Widmer Brothers originally brought authentic European style beer to the US in the late 70s. They pioneered the first American-style Hefeweizen. Many people love the variety and passion that comes from Widmer Brothers. They also have their own Blonde Ale, sweet beer, and dark beer.
Kona Brewing Co. In Kona, HI
The Kona brand makes beers that deliver the essence of the Hawaiian Islands. Longboard is its flagship brand.
BREW is able to have a wide distribution nationally, where most other craft brewers aren't able to. The breweries are located on both coasts and in Hawaii, which allows for efficient brewing and distributions of the beers all around the US. Since BREW has national distribution, the key to future success at this point is to effectively establish its beers as a representative of US beer. That's what the company is trying to do.
Net Sales for Craft grew to $149.2 million from $131.7 million, or 13.3%, in 2011 over 2010. Gross margin grew to 30.3% in 2011 from 25.6% the previous year. Net profit margin was 2.5% compared to 1.2% the previous year. Gross and net margin grew because the overhead is absorbed better with higher sales volumes.
Compare those numbers to its competitor, Boston Beer Co. (SAM), the maker of Samuel Adams. Sales for Boston Beer Co. grew to $513 million from $463.8 million, or 10.6%, in 2011 over 2010. Its gross margin grew to 55.5% in 2011 from 55.3% the previous year. Its net margin grew from 10.8% in 2010 to 12.9% in 2011.
Net margin would've been higher for BREW in 2011 if it weren't for the higher increase of SG&A. SG&A for BREW in 2011 was $39.7 million or 26.6% of net sales compared to 2010 it was only $29.9 million or 22.7% of net sales. The company says the reason for the larger percentage in 2011 was mainly due to investment in critical sales and marketing initiatives. They expect that the rate of increase in SG&A going forward won't be as big as in 2011.
The company's aggressive initiatives in 2011 are also apparent in free cash flow margin. I derived cash flow by taking cash flow from operations - capital expenditures. The company's free cash flow margin (free cash flow divided by revenue) for 2011 was -1.1%. For the years 2010 and 2009, the free cash flow margin was 4.7% and 5.4%, respectively. Capital expenditures was much higher in 2011 at $8.5 million. 2010 and 2009 had CAPEX of $4.7 million and $2.3 million, respectively. BREW is spending more because it's upgrading its facilities to prepare for further growth. The company expects to spend $8.5 to $9.5 million in CAPEX for 2012.
Strong Growth In 2012 Is Essential
Most of BREW's earnings growth in 2011 was from the gain on the sale of its Fulton St. Brewery. Right now at $7.40, BREW is priced to expect an 8% perpetual earnings growth rate. That kind of growth rate isn't sustainable for the long term because beer drinking is pretty flat in the US, or might grow 1-2% a year as the population grows. This is why it's essential for BREW to have a strong 2012 with revenue growth of at least 10%. If not, the stock will likely stay where it is or decline. With the large increases in CAPEX and SG&A investments, anything less than a 10% growth in sales would be a fail. Strong growth in 2012 will increase the branding power of its beers, and allow its breweries to get closer to maximum capacity, absorbing the overhead. This kind of strong growth all comes down to its beers becoming more popular and trendy. Evidence shows that more people are drinking BREW beer, but with heavy competition, it's often difficult to predict the outcome.
Anheuser-Busch Co. (BUD) owns a big chunk of the company as shown in the DEF 14A filings. It has owned the same amount, about a third, for several years now, so a takeover probably isn't in the works. BUD owns the portion of BREW it does to diversify its beer holdings.
Trade recommendation: Weak buy