Is Now the Time to Drink and Invest in Beer?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As if it wasn't bad enough to discover your brewski or glass of vino has been filtered through the skeletons of tiny diatoms; arsenic at twice allowable levels for US drinking water has been found in 360 German beers. And you thought wine stomping was gross! Those ancient marine organisms create diatomaceous earth, used to filter wine and beer to make them less cloudy.
Of course, this is a filtering practice used since the Middle Ages, but only recently have scientific instruments been sensitive enough to detect trace amounts of harmful compounds. These German beers use a particular kind of diatomaceous earth called kieselguhr that has more trace arsenic than do beers from other countries.
What's your poison?
While this brewhaha (pun intended and irresistible) roils, some serious beer drinkers may migrate to American beers, especially craft beers. As the company that has won more international beer tasting awards than any other craft brewer, those who drink German beers for their quality may choose the products of Boston Beer (NYSE: SAM) , maker of Samuel Adams brand beers and ales. This craft beer company offers over 50 different styles.
Anecdotal evidence from serious beer drinkers has it that their brands are consistently outstanding because of the four vessel brewing process and all-natural ingredients.
There is much to like about this company (besides its delicious brews). Its CEO Martin Roper was just profiled as Motley Fool CEO of the Week mainly for his consistent growth of top and bottom line and share price appreciation.
The history of this company is a classic American success story. Founder and Chairman James C. Koch found his great-great grandfather's recipe in his attic and began brewing the flagship Samuel Adams Boston Lager in his kitchen and selling it to Boston bars. (They do know their beer in Boston.)
And the company pays it forward with their philanthropic arm, Brewing the American Dream helping small businesses with a comprehensive loan and mentoring program. There you go, socially conscious investors. You're welcome!
The company is fully committed to the craft beer movement, competing in international festivals, investing in small breweries, and experimenting with what they call Extreme Beers, pushing the envelope of beer. Some of their special brews include barrel aged, brewmasters collection, small batch, limited release, seasonal, and even a light beer style. As a Dickens fan, next holiday season I want to try Old Fezziwig's Ale.
The fundamentals of beer
Boston Beer reported Q4 and full year 2012 results on February 20. Although earnings for both periods were down because of a favorable settlement of state taxes in 2011 that led to higher EPS, net revenues were up 13% at $580.2 million.
Boston Beer is the smallest of the big beer companies, Molson Coors Brewing (NYSE: TAP) and Anheuser- Busch InBev (NYSE: BUD), but has the biggest P/E at 35.89 and a forward P/E still higher at 27.70 than Molson Coors trailing 21.29 and forward 12.13 and Anheuser-Busch's trailing 22.56 and forward 18.38. The formerly American owned company, Anheuser-Busch, was bought out in 2008 by Brazilian-Belgian InBev. It is headquartered in Belgium.
However, when it comes to growth the PEGs at Coors and Anheuser-Busch are higher at 2.67 and 3.31, respectively, to Boston Beer's more fairly valued 1.62. Analysts expect 19.20% five year EPS growth for Boston Beer compared to 6.40% at Anheuser-Busch and only 4.80% for Molson Coors
Boston Beer's debt of $628,000 to cash of $74.46 million isn't bad. It only has 900 employees compared to the 18,700 at Molson Coors and the 117,632 at Anheuser-Busch.
Boston Beer has only 1% of market share compared to these behemoths of beer. It doesn't have the economies of scale that these others do and Boston Beer's margins are higher than these others due to their quality ingredients.
The company may be America's largest craft beer brewer but that's somewhat of an oxymoron as an American craft brewer is defined as one with less than 6 million barrels output per year. That would seem to limit Boston Beer's future output unless they invest in other smaller brewers or change their labeling after hitting that 6 million barrel landmark.
Corporate governance is a risk to consider with a New York Times story naming Boston Beer as a company with a "zombie director" on the Board (a director voted out by shareholders but still on the Board). This explains their corporate governance risk score of a high 8 overall with 10 for the Board.
Caveat: Chairman Koch and other insiders have been selling for a total of 270,761 shares in the last six months . However, the company has bought back $282 million worth of shares. And Boston Beer has serious institutional support. Neuberger Berman has a 12.99% stake worth $153 million. FMR LLC and Waddell & Reed both have 9% plus stakes.
What price beer
Analysts have a median price target of $138.00 on Boston Beer and share price is extended past that closing at $157.50 on April 12. It received a downgrade from Williams Capital Group from Outperform to Perform in February. At close to 52 week highs and up 53.51% over the last year, this name should be approached with moderation (as with drinking it). It also has a large short interest at 24.20%. Fool Rich Smith agrees with the Williams downgrade adding they didn't go far enough.
Competitor Molson Coors in the midpoint of valuations and PEGs and offers double the yield of Anheuser-Busch's 1.30%. Molson Coors is close to 52 week highs, too, extended past the median price target of $49.44. Its corporate governance risk is high at 10.
Anheuser-Busch is the oldest and biggest of all these; the number one in 2012 sales volume, followed by Molson Coors at number 2 and Boston Beer at number 5. It has 200 brands of beer, including some small craft beer like brands. Analysts still expect 10% upside with a median price target of $110.17.
It's five o'clock somewhere
American craft beers may get some increased attention after this report on German beers and arsenic. That said, all these names are pricey on valuation. Boston Beer is the growth name but the share price is a little high. Better wait until the stocks are cheaper at happy hour.
And remember what Samuel Adams' fellow colonial Ben Franklin said, "Beer is proof that God loves us and wants us to be happy." Cheers!
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. 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!