What a year it's been for Craft Brew Alliance (NASDAQ:BREW). The stock has run as high as 189% this year, outperforming its larger competitors such as Anheuser-Busch InBev (NYSE:BUD), and Molson Coors Brewing Company (NYSE:TAP) by a mile. It's even outpaced The Boston Beer Company (NYSE:SAM) which has had quite a performance itself, up as much as 97% this year. While the company itself has been executing quite well, Craft Brew Alliance's stock may have run ahead of itself to unsustainable levels.
Craft Brew Alliance reported its third-quarter results on Nov. 6. Sales and shipments improved by 10.7% and 12.5%, respectively. Diluted earnings per share doubled to $0.10. The company saw record growth "across brands, channels and geographies." Clearly, its brands and products resonate well with consumers. The company continues to expand into new markets, while its existing markets see increased demand.
Year-to-date results are a bit less impressive: sales are up 6%, with shipments up 8%, and EPS was $0.06 compared to $0.12. Still, CEO Terry Michaelson stated, "As we look ahead, we remain committed to continue driving strong sales and profit growth."
The third quarter results probably indicate the future more reliably than the less strong year-to-date results. Craft Brew Alliance CFO Mark Moreland stated, "The increase in volumes created a challenging operating environment for our beer business during the quarter." More demand than supply is a great problem to have.
Great company, lousy stock?
While there's little question that Craft Brew Alliance is performing well and appears to have a bright future, how much does it cost to invest in that future? At $16.00 per share and up around 150% this year, it may be a bit pricey. It trades with an analyst estimated P/E of 59 for 2014. While this would be growth of 125% compared to 2013 estimated earnings, sales growth is only expected to come in at 11.70%.
On a price-to-sales comparison, Craft Brew Alliance looks cheap. However, the larger brewing companies are able to spread their costs among much larger volume and realize much larger profits per dollar of sales. It's probably not a good idea to use price-to-sales ratios unless you firmly believe Craft Brew Alliance is the next Budweiser.
Anheuser-Busch InBev trades at less than 20 times 2014 estimated earnings. This is 14% growth over 2013 estimated earnings, while its sales are estimated to grow by 14.6%. Both of these are higher than Craft Brew's estimated growth numbers.
Molson Coors Brewing Company trades at less than 13 times next year's estimated earnings. This is only 4.3% growth over 2013 in earnings, and it is only expected to improve sales by 3.1% next year. While this growth is certainly much slower than the expected growth out of Craft Brew Alliance, Molson Coors Brewing also pays a 2.4% dividend. It offers a very long track record of solid sales and earnings. It's hard to imagine Craft Brew Alliance rightfully deserving a P/E ratio four to five times higher than Molson Coors Brewing Company.
The Boston Beer Company trades at around 38 times next year's estimated earnings. This is a healthy 18.9% growth over 2013 with expected sales growth of 16.5%. Similarly to Craft Brew Alliance, The Boston Beer Company is more production-constrained than demand-constrained. It may be the best comparison to Craft Brew in that regard as near-future sales will mostly depend just on production. Despite the higher sales growth expected from the maker of Sammy Adams, Craft Brew Alliance trades with a much higher P/E ratio, which means it's pricing in a lot of speculation about the company's future success.
Foolish final thoughts
Watch for either faster growth in sales and earnings to justify the valuation or a lower entry price. While Craft Brew Alliance looks overvalued as a stand-alone company, I still wouldn't bet against it or short it. The risk is that it gets bought out at a premium by one of these larger competitors. An acquirer could realize economies of scale and higher profits per sales dolla,r as well as potentially greatly increase the volume distributed and sold with its marketing and distribution might. Short of a buyout, Craft Brew Alliance needs a significant increase in profit to justify its current valuation.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool 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.