Despite Good Growth, This Large Craft Brewer Looks Expensive

Shareholders of Boston Beer (NYSE: SAM  ) must be quite happy, as the stock has risen significantly from a bottom of only $19 per share in 2009 to more than $200 per share recently. As Boston Beer seems to be quite expensive now, being valued at nearly 35 times its forward earnings, is it too late for new investors to get in? Could Boston Beer have more room to rise in the long run? Let's find out.

A growing craft brewer with a strong balance sheet

Boston Beer is considered the biggest craft brewer in the U.S., selling Samuel Adams beer, Twisted Tea flavored malt beverages and Angry Orchard hard-cider beverages. What I like about Boston Beer is its impressive and growing operating performance over the past 10 years. Revenue increased from $208 million in 2003 to $580 million in 2012, while net income rose from $11 million to $59 million during the same period. Moreover, Boston Beer has generated double-digit returns on invested capital in nine out of the past 10 years. In 2012, its return on invested capital was around 27.6%.

Interestingly, Boston Beer does not rely much on debt. As of June, it had $254 million in equity, $25 million in cash and only around $1 million in long-term debt. Boston Beer continued to impress investors with good second-quarter earnings results. Its net income experienced year-over-year growth of 37% thanks to core shipment growth of 21%.

The accelerated growth in the second quarter was due to Samuel Adams beers and improvements in the distribution of Angry Orchard. Because of the high growth, the company had some product shortages at the end of the quarter. Consequently, Boston Beer will install a new bottling line to meet peak-week demand. Moreover, the company will enjoy higher growth in the future, with an increasing investment in production and R&D. The future seems to be quite bright for Boston Beer.

However, what worries me is its market high valuation. At $211.60 per share, Boston Beer is worth $2.7 billion in market cap. That means the market values Boston Beer at as much as 35 times its forward earnings.

Molson Coors and AB InBev have much lower valuations

Compared to its peers, including Molson Coors Brewing (NYSE: TAP  ) and Anheuser- Busch InBev (NYSE: BUD  ) , Boston Beer has the highest valuation. Molson Coors Brewing is trading at around $52.50 per share, with a total market cap of $9.6 billion. The market values Molson Coors at only 12.45 times its forward earnings. In the past five years, Molson Coors has experienced significant improvements in its business.

Since 2008, it has delivered as much as $570 million in cost savings and synergies. The company's free cash flow rose by as much as 70%, from $508 million in 2008 to $865 million in 2012. In the next five years, it expects to save an additional $40 million to $60 million, including the synergies in a Central European deal. To drive the business forward, Molson Coors will focus on four main pillars: enhancing value-added innovation; more investment in power brands; gaining market share in the above premium" beer segment; cost reductions and commercial excellence.

AB InBev's valuation stays in between. At $100 per share, AB InBev is worth $160.4 billion in market cap. The market values AB InBev at nearly 18 times its forward earnings. Investors will be excited about the company because of its global-leading position, accounting for 43% of the total global beer industry's EBIT (earnings before interest and taxes). It also has the number-one position in three markets:  the U.S., Brazil and Mexico. In the largest global market, China, it ranks third.

Looking forward, AB InBev could continue to deliver decent results with its ongoing integration of Grupo Modelo. In the next three-to-four years, AB InBev expects to deliver around $1 billion of synergies. The cost of goods sold might account for 40% to 45% of the total savings, while the remaining 55% to 60% would come from operating expenses. Moreover, it plans to reduce the leverage level from 2.5 to 2 times net debt/EBITDA (earnings before interest, taxes, depreciation and amortization) by 2014.

Income investors might like AB InBev and Molson Coors with their decent dividend yields. While AB InBev offers investors dividends with a yield at 1.9%, Molson Coors' dividend yield is higher at 2.4%. However, AB InBev has a lower payout ratio at 29%, whereas the payout ratio of Molson Coors is 41%. If AB InBev increases its payout ratio to the same payout ratio of Molson Coors, AB InBev would yield nearly 2.7%.

My Foolish take

Boston Beer could continue to deliver great growth in the future. However, it seems like the high future growth expectations are reflected in the stock's trading price. If Boston Beer misses the expected growth, its stock will definitely sink. I would rather wait for a price correction before initiating a long position in this company. Among the three, I like AB InBev the most with its leading positions in markets around the world, a reasonable valuation and a decent dividend yield. AB InBev will generate good return for shareholders with its potential synergies with Grupo Modelo.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


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