Investors have bid up shares of Craft Brew Alliance (BREW) more than 100% over the past year, hoping that it is the next great growth story in brewing. The craft segment continues to win more customers and outpace the rest of the beer industry, reporting 17.6% volume growth in 2013 through the end of September versus a 0.3% drop for the overall industry. Of course, the segment is getting crowded with more than 2,300 players, including the participation of megabrewers Anheuser-Busch InBev and SABMiller through their Shock Top and Tenth and Blake craft labels, respectively. So, should investors bet on more upside at Craft Brew Alliance?
What's the value?
The company was formed through the 2008 merger of craft brewers Widmer Brothers and Redhook, followed by the 2010 addition of Kona to the family. Despite the amalgamation of corporate entities, the company has kept separate brand identities, allowing each brand to maintain its own loyal base of followers while benefiting from efficiencies of centralized administration. Craft Brew Alliance's brewing operations also benefit from its five brewpubs, four of which are co-located with breweries, which allow approximately 1.5 million new and existing customers to get further acquainted with its product lines.
In fiscal 2013, Craft Brew Alliance has posted an increase in its top line, up 6%, aided by slightly higher average pricing and a 4% increase in product volumes. While sales at its Widmer Brothers brand struggled against the competition during the period, its Kona unit generated strong double-digit sales growth as it gained further distribution points outside of its Hawaii and West Coast base. The company also benefited from solid volume increases in the new product area, including the successful Game Changer ale that was developed in partnership with the Buffalo Wild Wings restaurant chain.
On the downside, Craft Brew Alliance's operating profitability declined sharply during the period, hurt by rising distribution and packaging costs, as well as a lower margin in its brewpub segment. While the company relies heavily on the Anheuser-Busch wholesale network for its distribution needs, which should provide efficiency gains, Craft Brew Alliance's 1.8% operating margin pales in comparison to the mid-teens operating margin that craft brewing kingpin Boston Beer (SAM -2.06%) has generated during the same period.
Just as important, Boston Beer has been outpacing Craft Brew Alliance on the top line as well, forecasting 2013 volume growth between 21% and 24%, compared to expected volume growth between 7% and 11% for its smaller competitor. Boston Beer's volumes have benefited from an increase in market share for its flagship Sam Adams franchise, as well as from gains for its smaller Twisted Tea malt and Angry Orchard cider units. While the company's gross margin has been hurt by higher ingredient prices, its operating profitability has held up well due to scale efficiencies from an overall operating base that expects to sell 2.7 million barrels in the current fiscal year.
A better beer alternative
While shares of Craft Brew Alliance look tempting, given the recent growth of the craft beer segment, investors might instead want to consider a rising player in the import beer segment, an area that has similarly gained a greater share of the overall beer market over the past decade. Constellation Brands (STZ 0.06%) is certainly one player that is well positioned to continue growing its presence in the import segment, after completing its purchase of the remainder of Grupo Modelo's U.S. beer business in June 2013, a deal that gave it distribution control over best-sellers, in particular Corona and Modelo Especial.
Like its competitors in the craft beer segment, Constellation Brands has enjoyed rising overall sales volumes for its beer portfolio in 2013, with an organic increase of 2.3%, after adjusting for the effects of its deal-making activities. More important, the company was able to leverage the scale of its leading global wine business to produce improved profitability for its overall business. The net result was higher operating cash flow, $489 million generated during the period, which should allow Constellation Brands to further invest in its beer portfolio and pay down transaction-related debt.
The bottom line
Craft Beer Alliance has built itself into the No. 5 craft brewing franchise, but it has some work to do to get its profitability in line with the higher expectations that have led to heady share-price gains lately. While Boston Beer is a better bet, investors might want to let the craft brewing sector cool off a little and stick with the new force in import beer, Constellation Brands.
