If a tiny brewery is worth $1 billion, it stands to reason the second-biggest craft brewer should be worth a lot more.
What was Constellation Brands (STZ 0.41%) thinking? The owner of Corona beer and Svedka vodka recently announced it was buying craft brewer Ballast Point Brewing & Spirits for $1 billion.
Since it had just $50 million in sales last year, that assigns a valuation to the brewer of more than 20 times sales. Even though revenues are expected to more than double to $115 million this year, that's still a valuation of some 10 times sales.
If Ballast Point can command such a lofty valuation -- and it is on track to sell 4 million cases of beer this year -- what does that say for the valuation of the craft beer industry's leading brewer Boston Beer (SAM +0.71%), which sold more than 4 million barrels of beer in 2014? Well, for one, that it's significantly undervalued.
Still enjoying heady growth
There's little doubt the craft beer market remains the one aspect of the overall beer industry that is healthy. According to industry trade group Brewers Association, U.S. production volumes of craft beer rose 16% in the first six months of 2015, hitting 12.2 million barrels for an 11% share of the market. There are now more than 3,700 craft breweries operating in the U.S., up 22% from the year-ago period, while 1,750 more are in the planning stage.
In contrast, total U.S. beer volumes fell 6% between 2009 and 2013, and dropped another 0.6% last year. In Anheuser-Busch InBev's (BUD 0.51%) third-quarter earnings report, it said sales to retailers, or what Boston Beer refers to as depletions (a reliable proxy for demand), fell 2.1% in the U.S. causing it to lose 90 basis points of market share. Considering the U.S. represents the mass brewer's biggest market with a 47% share, which accounted for 24% of net volumes and 30% of net revenues in 2014, the continued slide is worrisome.
Tiny craft brewer Ballast Point Brewing may be on a tear, but Constellation Brands may be overpaying to break into the market. Photo: Bernt Rostad.
Crying in its beer
Yet Boston Beer is having a tough go of it lately, too. While its depletions grew 6% in the third quarter, on track with how it's performed all year, it's lower than what management was anticipating and led it to lower guidance to a 3% to 6% increase in depletions for the full year, down from its previous estimate of a 6% to 9% increase.
The maker of Samuel Adams says the slowdown is because of increased competition for shelf space in the craft beer industry. All those breweries coming online and waiting in the wings is apparently pressuring one of the premier names in the business.
Yet Anheuser-Busch is feeling it, too. As its beer volumes have fallen, it has stepped up its purchase of craft brewers to fill in the void, buying six brewers over the past two years, including Golden Road Brewing and Mill Street Brewery that it picked up in September.
And to make sure the acquisitions are successful, it's also buying up beer distributors, acquiring five of them in just the past few months. That has craft brewers worried that Anheuser-Busch is trying to take them off the shelf, and with good reason. A-B was quoted as saying that one of the distributors it bought "currently sells approximately 20 non-AB brands. We are seeking to keep a handful of local brands, pending supplier approval." The Justice Department is now looking at the acquisitions to see if they will unfairly stifle competition.
Starry-eyed projections
But with all the sharp elbows being thrown in the craft beer industry, it makes the price Constellation is paying for Ballast Point curious. Sure, the brewer is seeing tremendous growth these days, but the market researchers at Mintel say despite expected dollar sales growth of 22% for 2015 for craft beer, the rate will slow through 2020 because of "an expanding range of alcohol options."
Perhaps the one aspect of the acquisition that justifies the price tag is that Ballast Point is a premium craft beer, with a barrel of beer costing about $335, well ahead of the $227 a typical premium beer gets. It's partly the result of the premiumization of beer in general that's occurred, though Boston Beer has its own high-end beers, including its limited-run Utopias that sell for around $200 a bottle.
Shares of Boston Beer surged 6.5% higher after Constellation announced its acquisition, undoubtedly as the market realized if the 31st biggest craft brewer could command such a price tag then the second-largest should be worth a lot more as well.
But there are still some who think Boston Beer is overvalued. Actually, a lot of people do, as almost 1.4 million shares of Boston Beer's stock is sold short, or 16% of its shares outstanding. But if this buyout causes more investors to rethink the brewer's valuation, than we may see a run-up in its price as short-sellers cover their positions.
Boston Beer remains one of the leading craft brewers in the industry, and with a line of hard teas and ciders to also fill out a drinker's thirst profile, it's probably long overdue for the market to see its stock as significantly undervalued. And it has Constellation Brands to thank for waking the market up.
