This Hot Trend Could Lead to Some Cool Profits

One of the hottest trends going today is craft beer. What used to be a niche corner of a $100 billion domestic market is now gaining steam, and there are plenty out there trying to stake their claim.

May 15, 2014 at 7:00PM

One of the hottest trends going today is craft beer. What used to be a niche corner of a $100 billion domestic market is now gaining steam, and there are plenty out there trying to stake their claim. And while Boston Beer basically helped define the craft beer market we know today, Craft Brew Alliance (NASDAQ:BREW) is also growing its portfolio of beers and making a name for itself in the process.

That's a big number
$100 billion: That's the size of the overall U.S. beer market in 2013. That comes to 196,241,321 barrels of beer sold. And it actually fell 2% from the previous year. The good news is that while the overall market fell, craft beer actually grew about 20% over the previous year, to a whopping $14.3 billion.

Translation: This is a large and growing market opportunity, and Craft Brew Alliance appears poised to continue capturing its fair share. The slide below from a recent investor presentation shows how Craft Brew Alliance stacks up with its competition:

Craft Brew Share Slide

Remember this
If there's one number you want to take away from Craft Brew Alliance's most recent quarter, it's this one: 260 basis points. That's how much the company grew its gross margin over the same quarter last year, and the reason it's important is because it was one of the company's top two points of focus headed into the new year.

If management is capable of not only recognizing its challenges but also turning them around, that's a sign they may be on to something big. And with a market opportunity as large as the craft brew market is today, investors should be licking their chops. The slide below explains in greater detail management's gross margin target and how they think they can get there:

Craft Brew Margin Target

Excuses, excuses
Craft Brew Alliance had a stellar 2013. And by stellar, I mean the stock was up 153%. Unfortunately, 2014 hasn't been as kind. This could be attributed to a number of factors, though, including the general pullback in small caps, a low amount of shares that float on the open market, growth rates inferior to larger competitors like Boston Beer, or all of the above.

Fundamentally, though, it looks like management may be on to something with their rejuvenated focus on margins and growing the company's top line. And its national distribution strategy through the Anheuser-Busch wholesaler network alliance gives it a leg up on perhaps the greatest challenge facing any craft brewer today: distribution. Given the fact that Anheuser-Busch InBev owns about a third of the shares outstanding, it certainly seems to have a vested interest in Craft Brew Alliance's success.

Turning beer into money
I'm not saying Craft Brew Alliance has it all figured out and it's nothing but upside from here. With shares trading hands at 15 times EV/EBITDA, though, it doesn't look all that outrageous compared to Boston Beer, which trades at 19.5 times. I wouldn't be shocked at all to see A-B InBev actually buy the company outright at some point in an effort to grow its own craft beer portfolio. Either way, the recent pullback in shares has put this company on my watchlist; you may want to add it to yours, too.

Your cable company is scared, but you can get rich
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Jason Moser has no position in any stocks mentioned. The Motley Fool recommends and 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.

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