U.S. beer shipments dropped by 2.2% in 2009. This spells trouble for big brewers Anheuser-Busch InBev (NYSE: BUD) and Molson Coors (NYSE: TAP), which experienced declines of 2.1% and 1.9%, respectively. Other losers in this consumer goods sector include Heineken and Diageo's (NYSE: DEO) Guinness unit. Their loss is the craft brewing industry's gain. In 2009, craft brewers shipped 5% more beer than in 2008. At the top of this list is Boston Beer (NYSE: SAM), which saw a 1.7% increase, and more importantly a tremendous lift in profits. Rising with the tide, its stock is up 82% in the last year, leading some to conclude that its stock is expensive. Despite unofficially losing its craft brewer status - it makes more than 2 million barrels a year - it continues to impress, and I believe plenty of appreciation is still available. (Beer is a complex beverage shaped by supply and demand, production and distribution, with regulation thrown in for that extra kick. Check out Beeronomics: Factors Affecting Your Pint.)
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Stock Valuation Ratios - Major Players
|
Company
|
P/E
|
P/B
|
P/S
|
P/CF
|
|
Boston Beer
|
24.1
|
4.0
|
1.6
|
10.7
|
|
Anheuser-Busch InBev
|
27.9
|
3.5
|
3.5
|
13.6
|
|
Molson Coors
|
12.9
|
1.1
|
2.6
|
11.4
|
|
Diageo
|
15.7
|
8.9
|
2.7
|
16.0
|
|
AmBev
(NYSE: ABV)
|
8.4
|
5.0
|
2.7
|
5.7
|
Business Keeps Getting Better
Since November, Boston Beer has been on a roll. First, it announced a strong third quarter during which revenues increased 8.6% and earnings per share rose to 72 cents. Then it raised its full-year earnings per share outlook to between $2.05 and $2.35 - this on top of an earlier increase. Much of its enthusiasm stems from larger-than-expected efficiency gains at the Pennsylvania plant it bought from Diageo in 2008. Boston Beer believes the plant can handle 10% growth from present levels without expanding. This alone will do wonders for its cash flow. In fact, its 2008 annual report indicates the Pennsylvania plant alone has the capacity to produce in excess of 2 million barrels a year. With approximately 52% of its annual production in-house, up from 35% before the June 2008 acquisition and likely to increase in 2010, further cost savings could lead to higher earnings. It's a great position to be in.
Excellent Use Of Capital
Three things about the company's use of capital stand out. First, it only has minor debt levels. That's impressive. Second, it's sitting on $44.8 million in cash as of its Q3. Lastly, its record of smart share repurchasing is exemplary. For the first nine months of 2009, it repurchased 139,500 shares at an average price of $29.39. Today, its shares trade above $45. Since the board approved its current $140 million share repurchase program, it has bought 8.6 million shares at an average price of $13.73 a share. That's also outstanding. With $21.9 million left, if you see it buying shares, you should be too. Management clearly understands the value of its shares.
Bottom Line
I'm not a big fan of momentum investing, but in this case it's justified in my opinion, and here's why. First, Boston Beer's enterprise value to EBITDA is lower than its competitors. Heineken's recent acquisition of Femsa's (NYSE: FMX) beer assets sets up a Mexican beer war with Grupo Modelo, 50%-owned by Anheuser-Busch InBev. With the two largest global brewers distracted in Mexico, Boston Beer could see greater opportunities to grow domestically. That's good news. Even better is industry experts' prediction that another big beer deal will happen within 12-18 months. While Boston Beer likely isn't what they were referring to, it is the right move for someone looking to grow the U.S. market, and that's where founder and Chairman Jim Koch comes in. Koch owns 32% of its stock and will need compelling reasons to let his baby go. (For more information, read Parched For Profits? Try Beverage Stocks.)
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