Another Brew Please

By Hans el - November 28, 2012 | Tickers: BUD, SAM, BREW, TAP | 0 Comments

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I especially enjoy researching companies that are present in my daily life.  It allows me to go beyond evaluating the fundamentals of a business and do a grass roots style assessment allowing me to compare the real world to the numbers and letters in the annual reports.  These are my favorite kind of investment opportunities.

I wanted to add a restaurant and/or consumer goods company to my portfolio.  Previously I looked at Craft Brew Alliance (NASDAQ: BREW).  I love the concept of the Craft Brew Alliance.  By retaining the brand of each of the breweries they are able to preserve their microbrewery identity as they grow.  I also like the fact they are backed by Anheuser-Busch Inbev (NYSE: BUD), which gives them access to nationwide distribution channels.  What I do not like is that they are very small, they have a limited cash position compared to their long-term debt, and their valuation is just way too high.  It is way too early in their game for me. 

Nonetheless, I do like the craft brewery niche.  In 2011, the $96 billion US beer market is shrunk by 1%.  The “craft brew” segment grew by 13% in volume and by 15% in revenue to $8.7 billion.  My search quickly led me to Boston Beer (NYSE: SAM).  With a market cap of $1.5 billion and revenue of $0.5 billion in 2011, Boston Beer is the giant amongst the craft brewers, but it is minuscule compared to the dominant US based household names.  Anheuser-Busch has a market cap of $138 billion and annual revenue of $38 billion.  Even compared to Molson Coors Brewing Company (NYSE: TAP) with a market cap of $7.3 billion and revenue of $3.5 billion, Boston Beer is still a small fish.

Ever had a sip of Miller Lite or Coors after having a local brew or a Sam Adams? It is garbage once you have tasted true craftsmanship. It is nothing short of a miracle that they have gotten away with it for so long. That ride is over.  The American public is becoming increasingly aware and it is starting a ripple effect.  It is no coincidence craft brew sales are growing and the rest of the beer market is flat or shrinking, including imports. 

The evidence is all around you.  Super markets are carrying a larger variety of beer, including local options.  Here in Florida, the World of Beer franchise is going nationwide.  According to the Brewers Association, in 2011 there were over 1900 microbreweries operational of which 250 opened their doors that same year. 

Unfortunately, there are not many options to invest in the craft brewery segment.  So my bet is on Boston Beer.  Besides strong fundamentals and reasonable valuations, key reasons influencing my decision include:

• Boston Beer branding.
• Boston Beer’s portfolio is superior to the traditional domestic mass produced brew and can easily hang with the imported competition, sales of which were up by only 1% in 2011.
• Boston Beer is the only craft brewery that has the scale to compete nationwide.
• Boston Beer’s under the radar strategy to winning over more female and non-beer drinking customers through the launch of Angry Orchard Traditional and Hard Cider, tells me that management is always thinking “offense.”

My bet on Boston Beer is also a bet on an increasingly better educated American beer loving public who are turning away from Budweiser and toward a better quality beer that ideally is abundantly available across the country, unlike a local craft brew.  Boston Beer is the best-positioned brewery with the nationwide distribution network that can benefit from this accelerating trend.

Of course there are risks.  Two of the risks I will continue to monitor:

1. Branding - It is critical for Boston Beer to retain its craft brewery image.  They have the heritage, but as Boston Beer continues to grow they must pay special attention that their culture and craftsmanship does not change.  It would not be the first time that a company looses its identity and gets disconnected from its original roots.  This is what sets them apart from the Anheuser-Busch category.  You can taste that difference.
2. Competition - Anheuser-Busch has deep pockets.  It has a stake in Craft Brew Alliance.  It could decide to up its investment and support to attack Boston Beer. That would be a formidable challenge to overcome.

I believe #1 is under control and #2 is years away if it will ever happen. 

Today, Boston Beer has less than 1% of the US beer market.  The craft brew segment is growing organically caused by a changing preference in beer.  There is a lot of growth left for a long time, making it a great buy and hold investment at the right price points. 

This party is just starting.

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