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Brew Huge Profits With the New Face of American Beer

Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On July 13, 2008, Anheuser-Busch (NYSE: BUD) sent shock waves through the American beer industry after it agreed to be sold to European rival InBev, effectively forming the world's largest brewing company with combined annual sales of more than $36 billion.  

Unsurprisingly, the announcement was preceded by nearly two contentious months of chest thumping and lawsuits during which investors were treated to an attempted board overthrow by InBev as Anheuser-Busch accused the Belgian beer maker of dishonesty regarding its financial commitments.

The Rise of "Better Beer"

All the while, another small, patriotic brewer was steadily working its way into the mugs of American beer drinkers.  With comparatively minuscule annual revenues at the time of only $450 million, Boston Beer Company (NYSE: SAM) simply continued focusing on quality over quantity as it had done since the debut of its flagship Samuel Adams brand in Boston on Patriot's Day in 1985.  In fact, Boston Beer Founder and CEO Jim Koch still regularly jokes Anheuser likely spills more beer each year than his company produces.

Now, as AB Inbev's Budweiser brand continues to lose market share, Boston Beer has managed to grow its revenues by more than 10% for each of the past five years while maintaining an astounding annual EPS growth rate of 39.39%.  Even so, Boston Beer has plenty to gain as it currently holds less than 1% of the domestic beer market.

Low-Hanging Fruit

That said, even a small loss in market share remains unacceptable to the world's largest brewers.  As mega-brands like AB InBev and Molson Coors (NYSE: TAP) began to envy the growth of their smaller competitors, they created multiple "faux-craft" beers like Shock Top and Blue Moon Belgian Wheat to compete.  Heck, AB InBev even went so far as to acquire distribution rights and a 32.2% stake in Craft Brew Alliance (NASDAQ: BREW), the maker of traditionally-craft brands including Red Hook, Kona, and Widmer.  Naturally, as fellow Fool Rich Duprey pointed out two weeks ago, not everyone has taken kindly to the big boys' encroachment on true craft breweries' turf. 

Still, as its stock continues to rise, recent insider sales have many wondering whether Boston Beer's best days are behind it.  More specifically, investors' alarm bells began to sound in November as Koch sold 96,000 Class A shares for around $11 million.  While the proceeds of these sales may seem significant, they pale in comparison to the 4.1 million Class B shares Koch still owns, representing nearly a third of the company he built from the ground up.

Despite fierce competition and the stubborn upward march of its Samuel Adams brand, Boston Beer has also proven it's not afraid to venture outside its foamy comfort zone with its Angry Orchard hard cider and Twisted Tea products.  Sure enough, shares of SAM exploded upward on Dec. 13 after the company raised earnings guidance, thanks largely to the unexpected popularity of these unorthodox brands.

The valuation

Now, with the stock up 22% over the past three weeks, is SAM a buy at current levels?  To help us find out, let's take a look at some of Boston Beer's key metrics next to a few of its peers:

<table> <tbody> <tr> <td> </td> <td><strong>Boston Beer Company</strong></td> <td><strong>Craft Brew Alliance</strong> <span class="ticker" data-id="216131">(NASDAQ: <a href="http://caps.fool.com/Ticker/BREW.aspx">BREW</a>)</span></td> <td><strong>Anheuser-Busch InBev </strong><span class="ticker" data-id="203011">(NYSE: <a href="http://caps.fool.com/Ticker/BUD.aspx">BUD</a>)</span><strong> </strong></td> <td><strong>Molson Coors</strong> <span class="ticker" data-id="206318">(NYSE: <a href="http://caps.fool.com/Ticker/TAP.aspx">TAP</a>)</span></td> </tr> <tr> <td><strong> Market Capitalization </strong></td> <td> $1.79 billion</td> <td> $137.4 million</td> <td> $142.46 billion</td> <td> $7.89 billion</td> </tr> <tr> <td><strong> Debt-to-Equity Ratio </strong></td> <td> 0.00</td> <td> 0.12 </td> <td> 1.06  </td> <td> 0.57  </td> </tr> <tr> <td><strong> Current Ratio</strong></td> <td> 1.80</td> <td> 1.10 </td> <td> 0.53 </td> <td> 0.70 </td> </tr> <tr> <td><strong> Current P/E Ratio</strong></td> <td> 31.15</td> <td> 56.00</td> <td> 19.62 </td> <td> 14.21 </td> </tr> <tr> <td><strong> Est. Forward P/E Ratio</strong></td> <td> 27.83</td> <td> 36.40 </td> <td> 17.22 </td> <td> 11.02 </td> </tr> <tr> <td><strong> Dividend Yield</strong></td> <td> N.A.</td> <td> N.A.</td> <td> 1.50%</td> <td> 3.00%  </td> </tr> <tr> <td><strong> Payout Ratio</strong></td> <td> N.A.</td> <td> N.A. </td> <td> 30.00%</td> <td> 42.00% </td> </tr> <tr> <td><strong> Return on Invested Capital</strong></td> <td> 26.10% </td> <td> 2.00% </td> <td> 10.10% </td> <td> 4.7%</td> </tr> <tr> <td><strong> PEG Ratio (5 yr expected)</strong></td> <td> 1.58</td> <td> 2.24</td> <td> 1.75</td> <td> 2.34 </td> </tr> </tbody> </table>


At first glance, Boston Beer appears expensive, trading for 31.15 times trailing earnings and 27.83 times next year's estimates.  However, when has SAM ever looked cheap?  After all, its current trailing P/E ratio isn't significantly higher than its average of 29.24 over the past five years - a period during which the stock nearly quadrupled.

In addition, when we measure SAM's forward P/E ratio against analysts' long-term annual growth estimates of 17.6%, it has a PEG ratio of 1.58 -- a considerably-lower premium on growth compared to Craft Brew Alliance, AB InBev, and Molson Coors.

Boston Beer also boasts a sterling balance sheet with $62.8 million in cash and no debt.  Additionally, while SAM doesn't pay a dividend, its superior ROIC of 26.1% shows an impressive knack for creating shareholder value by reinvesting capital in its business.

Foolish Bottom Line

Though Boston Beer Company repeatedly faces valuation worries and relentless competition from all sides, these concerns are par for the course for the 28-year-old craft brewing pioneer.  

The fact remains shares of SAM now represent the world's largest publicly-traded, American-owned brewer -- a massive advantage which can't be overstated.  As Boston Beer continues to responsibly increase brewing capacity and expand its distribution channels, it will undoubtedly continue to reward shareholders when the world discovers what real American beer is all about.

Steve Symington 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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