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"Like a Rock." Are Brewers Immune to Recessions?

|Includes:BRBMF, Anheuser-Busch Inbev SA/NV (BUD), SAM, TAP



Sometimes we get a little too wrapped around the axle cogitating, researching, deliberating and selecting our investment alternatives.  We need to take time, relax, have a glass of champagne or beer and remember that nobody bats 1.000 in this business (though there are plenty who will try to make you think they do!)


You may not be able to afford Dom Perignon when times get tough, or a very nice Piper-Heidsieck or even an eminently enjoyable California Korbel.  But if ongoing revenue stream during bad economic times are any indication, given a choice of drinking bad champagne or a good beer, clearly many people will choose a good beer.


That does not mean that consumption grows during a recession.  It normally dips a bit.  But the dips in beer consumption are usually shallower than in many other industries.  “Champagne taste on a beer budget” characterizes many of us in the US and the rest of the world as beer consumption eases slightly in recessions but typically rebounds as a coincident or occasionally leading indicator of investor sentiment and general well-being as the recession is ending.  (Champagne tends to rebound in the later stages of bubbly euphoria.  Stay tuned -- I want to demonstrate this in a future article highlighting my Beer/Champagne Ratio…)


There are a number of mega-brewers out there and no end of analysts who will crow as if they created the first serendipitous meeting of barley, hops, water and yeast whenever they issue a buy recommendation on AB InBev (NYSE:BUD), the Belgian-Brazilian-US giant that is the biggest of all brewers, with such flagship brands as Budweiser, Stella Artois, Beck’s, Michelob, Bass, Labatt, St. Pauli Girl, Lowenbrau, and a hundred or so others, some great, some -- well, let’s just say they are designed for the mass market or a less discriminating palate!


Following BUD in the pantheon of large brewers is SABMiller (OTCPK:SBMRY).  I discovered their Castle Lager on my first trip to South Africa – as did many others.  South African Breweries (the “SAB” part of the moniker) was founded in 1895 following the discovery of gold in 1886.  (9 years???  These were some sloooowww miners!)  Today, SBMRY’s brands include Italy’s Peroni, Czech Republic’s Pilsner Urquell, The US Belgian-style Blue Moon, Grolsch, MGD, Miller Light and Miller High Life.


After these two giants, there are still plenty of familiar names like Heineken (HINKY), MolsonCoors (NYSE:TAP), and Boston Beer (NYSE:SAM) but, remember, there are more than 110,000 different beers produced for sale from nearly 10,000 different brewers worldwide.  That’s a lot of beer.  (For those who pride themselves on having tried a few hundred or a thousand different beers, don’t be discouraged!  Remember, as upscale cruise line Cunard used to say, “Getting there is half the fun.”)


Any one of the publicly-traded brewers may be a good investment at one time or another but I’ve uncovered one (actually popped the top, but that’s almost like uncovering) that is publicly-traded, makes a fair-to-middling great beer, and pays a very nice dividend.  Coming into what may be a tough first half of the year, I like the idea of owning a company with steady cash flow that covers a very nice dividend.  The only problem is that it is a Canadian income trust, so it’s dividend may well be affected – most likely reduced – next year or the following.  Of course, by then, increased cash flow may render the current dividend rate sustainable or even “raise-able.”  Since this is a company that grows revenues year-on-year, it isn’t quite the same as the better-known “CanRoys” in the pipeline business.

The company is Big Rock Brewery Income Trust (OTCPK:BRBMF).   I had their Black Amber and Traditional Ales recently and am now on a quest to try all their other offerings.  More importantly, at least to those who are investors but not beer-drinkers, the company is a true small-cap, with just under $40 million (US) in sales.  They are located in Calgary, Canada, one of my top investing destinations, and therefore offer diversification from your USD-based investments.  I believe more and more Americans and Canadians are looking to try quality, rather than mass-marketed, beers and there’s a Big Rock along that path.  While overall beer consumption was flat to down in 2009, “craft” beers like Big Rock enjoyed a 12% increase in consumption last year.

Big Rock, and all other craft brewers in Alberta, enjoy a unique excise tax situation: as long as they produce less than 400,000 hectoliters per annum, they pay a tax that is less than half what larger brewers pay.  Clearly, some politician in Alberta wants to see a resurgence of craft beers…

Back to valuation dynamics: Big Rock enjoys more than $11.5 million (again, US) free cash flow every year and trades around 8 times that fcf.  They pay 10 cents Canadian (9.6 cents US) every month and they sell for 15.53, a new high for the year, giving them a PE of 11.9, a dividend yield of 7.5%,  and a price/sales ratio of 1.56.  Their debt to equity is just 13%. Their return on average equity is 47%, and their most recent net margins were 20%.

The beer itself is all natural, without any preservatives or chemicals. There are only four ingredients: malted barley, yeast, hops and water. They don’t pasteurize their beers. Instead, they micro-filter them, which takes out any yeast or spoilage bacteria. Real ingredients and as little processing as possible lets the true flavor shine through.

As more workers flock to the oil and gas fields in Alberta, then return home to other provinces or US states, I predict they will remember Big Rock’s offerings and make this a desirable brand, maybe even desirable enough to be a takeover target by a larger brewer looking to expand. 

Whether that ever happens or not, I like the idea of owning (1) a growing company with good cash flow (2) paying a good dividend (3) in an industry that is – relatively – immune to the worst effects of a recession and (4) one that is priced in Canadian dollars, which I see as rising in value against the USD.  If you like the investment dynamics but aren’t a beer-drinker, that’s OK – just send any of the latter you don’t want from this company to me…



Author's Disclosure: We and / or clients for whom this investment is appropriate, are long shares of Big Rock Brewery Income Trust.

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