Why Is Craft Brew Alliance Skipping through May?
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It’s been a gloomy May so far: all of the indexes are down and investors are wary of risky assets. Why has the microcap Craft Brew Alliance (Nasdaq: BREW) clocked steady gains?
Craft Brew Alliance is up 29% YTD, including a steady 1.7% for May – in comparison to the Dow’s 3% YTD and -4.65% for May. These gains rest on a steady string of positive earnings news. However, investors should be aware that a cosmetic move also drove the stock price up and that the worrisome distribution agreement that Craft has with Anheuser-Busch (NYSE: BUD) has not changed.
The good news behind Craft’s climb is its earnings. In March, the company reported increases across the board: sales were up 13% to $149.2 million, adjusted net income was up 94% to $3.2 million, and EPS was up 70% to 17 cents. Furthermore, Craft used its cash to pay off nearly half its long-term debt. To sweeten the news, it projected EPS of 20 to 25 cents a share in 2012. On May 10, the company released positive first quarter results, recording net income of $698,000 on $41.6 million in sales, compared to $16,000 on $35 million in last year’s first quarter. Not only is Craft growing, it’s becoming more profitable.
Here’s the weird news: Craft did not move much on the days after or before its earnings reports. More than half of its yearly gain comes from the last week of March, after it changed its ticker symbol from HOOK to the more fashionable and recognizable BREW. The Dow increased by about 1% that same week and other beer stocks -- Molson Coors (NYSE: TAP), Anheuser-Busch (NYSE: BUD), Boston Beer Co. (NYSE: SAM) -- were largely flat, so the run up was not part of a broad rally.
More worrisome, however, is that Craft’s distribution agreement with Anheuser-Busch has not changed. Craft is able to grow at the rate it has because Anheuser-Busch distributes its products across the country. Craft pays distribution fees, as would be expected, but the agreement also gives Anheuser-Busch surprising discretion and power. Not only can Anheuser-Busch appoint two board members, it can also terminate the distribution agreement at any time if Craft marketing, management or board does anything that Anheuser-Busch deems to be “incompatible conduct” or contrary to its image or reputation. Craft’s growth prospects exist at the whim of Anheuser-Busch.
In summary, Craft Brew Alliance is skipping through a sunny May, while the rest of the market takes a beating. On one hand, Craft’s gains come on excellent and steady earnings reports. On the other hand, the market seems to have reacted more to a cosmetic ticker change than to the company’s earnings. Even scarier, Anheuser-Busch holds veto power over the company’s future.
CallaMarie has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer and Molson Coors Brewing Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
