Capitalizing on the Light-Beer Demise
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A recent report suggested that light-beer consumption has been falling as consumer preferences move to other choices. While this trend has been discussed for a while now, let's examine three stocks that could benefit from a continuation in this changing dynamic.
The craft brewers
While the general beer market has been struggling recently, craft beer has been on a strong upswing. Craft beer sales grew by 15% over the past year but still account for less than 10% of total beer sales. These trends could continue into the future and make Boston Beer (NYSE: SAM) and Craft Brew Alliance (NASDAQ: BREW) interesting investment opportunities.
Boston Beer is the company behind Sam Adams, arguably the most popular craft beer on the market. Sam Adams currently has approximately 50 varieties of beer and has penetrated international markets. The company has enjoyed great financial success, growing EPS at a five-year annualized rate of 23.5%. Boston Beer continued to impress in its most recent quarterly report as revenue grew by 23% from the same quarter last year and EPS came in at $1.45 versus $0.39 in the same quarter last year. The company continues to develop new varieties and recently started to can its beer, opening Boston Beer to a new segment of the market.
Craft Brew Alliance is a smaller player in the craft-beer market that is responsible for such brands as Widmer Brothers, Redhook, Kona, and Omission. The company also operates five pubs and sells branded apparel and merchandise at these pubs. Craft Brew Alliance is significantly smaller than Boston Beer, with a market capitalization of just $181.7 million versus Boston Beer at approximately $2.7 billion.
However, Craft Brew has aggressive expansion plans. In 2010, the Oregon-based company only had 15% of its sales come from the East Cost. In 2013, it estimates 25% of sales will come from the East Cost and all of its brands are now exported to 14 countries. The company has continued to introduce new brands to national distribution through the master distribution agreement with Anheuser-Busch.
In the first quarter 2013 earnings report, the company reported a $0.09 net loss versus a $0.04 gain in the same quarter in the prior year. This was mainly a result of a reorganization and a decline in the gross margin. The company expects that the reorganization and geographic expansion will drive revenue and profit growth in 2013.
While the beer market loses steam, the spirit market has been benefiting from shifts in consumer tastes. Beam (NYSE: BEAM) is a major player in the spirit market and can offer solid exposure to this trend. Beam is a global manufacturer of such well known brands as Jim Beam, Maker's Mark, and Sauza. The company showed strong results in its first quarter 2013 earnings release, with net sales increasing 8% and EPS up 47%.
Beam saw some of its major brands deliver impressive results, with Maker's Mark comparable-net sales growing 44% and Skinnygirl growing 140%. Beam also has the size and strength to carryout strategic acquisitions and these can further contribute to the company's financial performance.
The company generated $378 million of operating cash flow in 2012 and has $366 million of cash on the books. This position will allow it to carryout additional acquisitions, like the recent purchase of Pinnacle Vodka that helped drive revenue growth in first quarter 2013.
As consumer preferences continue to move away from the traditional beer segment, these three companies are ready to capitalize. Boston Beer has been a high flyer, and while I have been critical of the high P/E ratio in the past, the company continues to beat estimates. At a P/E of 44, the stock is pricing in quite a bit of growth, but the company has been delivering.
Craft Brew Alliance is a riskier play given its small size. However, with ambitious expansion plans, the stock could prove a major winner for the long-term investor willing to give the company the time to develop.
Beam is a well established player with a strong brand portfolio that will allow for continued success. The company trades above the industry average P/E at 24.3, but it is still well below its historic five-year average P/E of 36.5. The company also offers a small dividend yield of 1.4%. Any one of these companies can be a great addition to your portfolio if you believe consumer tastes will continue to change.
John Timmes has no position in any stocks mentioned. The Motley Fool recommends Beam and Boston Beer. The Motley Fool owns shares of Boston Beer. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!