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Small Cap Play: HOOK

|Includes:Craft Brew Alliance Inc (BREW)

Even as one of the top ten brewers in the United States, Craft Brewers Alliance (NASDAQ:  HOOK) is a company with plenty of room to grow.

The company recently acquired Kona Brewery and has seen growth in its two flagship brands, Redhook and Widmer.  However, most investors want to know how the company plans to continue to grow.  This is where Craft Brewers Alliance has a competitive advantage over many other small craft brewers.

One of the most important elements to growing a small-cap company is efficient distribution.  Great products mean nothing if you cannot get them out to the end consumer.  Craft Brewers Alliance has a strategic partnership with Anheuser-Busch InBev (NYSE:  BUD) that allows HOOK to use the well established distribution channels of the industry giant.  In fact, Anheuser-Busch InBev owns about one-third of Craft Brewers Alliance.

Although the company relies on the distribution network of A-B InBev, I do not believe this will pose a severe risk to the company.  It is highly unlikely that A-B InBev will terminate such a contract when it has a large equity stake in Craft Brewers Alliance. 

The company has also been expanding its marketing operations to increase brand awareness.  This has positively contributed to top line growth over the past few years.  Helping new customers discover the brand (and old ones rediscover it) will help to boost sales into the future.

With increases in marketing expenses and capital expenditures, earnings and cash flow are expected to be low over the next twelve months.  However, the intent from investing in these areas is to grow the top and bottom lines.  If successful, which I believe they will be, the company should have excellent growth prospects for the next few years to come.

 

HOOK

SAM

BUD

Price (10/3/2011 Close)

$5.10

$72.13

$52.56

Trailing P/E

13.11

16.88

16.59

Forward P/E

36.4

18

12.4

Price/Book

0.9

5.2

4.6

Price/Sales

0.7

2.1

2.2

Current Ratio

1.15

1.72

0.75

Debt/Equity

0.16

N/A

1.14

Click to enlarge

 

 

My absolute pricing models tell me that intrinsic value is around $7.50 per share using a modest 10% growth rate.  At current market prices, this could potentially be a good buying opportunity.  As with any small-cap company with limited street coverage, there could be things that have not been made public that could drastically impact the share price of the company.  Remember to use continuous diligence when investing in small-caps.

Disclosure: I have no positions in any stocks mentioned, and do not intended on initiating a long position over the next 72 hours.

Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.

Stocks: BREW