Bear of the Day: Craft Brew Alliance (BREW)

The beverage industry is forced to deal with constantly changing trends and customer tastes. While some consumers have a favorite drink or two that they purchase over and over, a much bigger portion of the market prefers to try new beverages often. New products become popular and sales soar seemingly overnight, leaving the last "hottest drink" suddenly out of favor.

The current alcohol beverage DuJour is “spiked seltzer,” a segment largely defined by the popularity of White Claw, a product for which a brand name is coming to define an entire class of product. With sales that increased more than 300% between May of 2018 and May of 2019 and continue to climb, White Claw was the subject of a well-publicized nationwide shortage heading into this year’s Labor day Holiday weekend.

They simply couldn't make enough to keep up with demand - a nice problem to have.

Once upon a time, Americans solidly preferred beer over wine or spirits, and most of the beer sold was light lager varieties, produced by huge breweries like Budweiser, Miller and Coors. The 1990’s saw a steep rise in the popularity of craft brewed beer, made in smaller batches and featuring a more diverse set of ingredients and flavors.

The first widely successful craft beer was Samuel Adams Boston Lager – produced by the (now huge and public) Boston Beer Company (SAM). Once the floodgates were open, hundreds more small competitors followed and the big brewers took notice, acquiring dozens of small brewers and selling their products under the original brands - except they were now brewed in modern facilities and enjoyed efficient nationwide distribution.

The big breweries walk a fine line with craft beer. Many craft beer customers consider themselves iconoclasts, seeking out lesser known and unique beers and sometimes displeased to find that what was apparently a “microbrew” is actually produced by Anheuser Busch InBev (BUD) or Molson Coors (TAP) - even if the arrangement keeps their favorite beer available at every grocery store at a reasonable price.

Beermakers are also facing a customer migration to spirit-based beverages because of consumer preference toward low-carbohydrate drinks, as well as declining sales of alcoholic beverages overall.

With $200M in annual sales, Craft Brew Alliance (BREW) is among the largest of the “small” brewers and its flagship Kona brand capitalizes on an image of a laid back Hawaiian lifestyle. BREW attracted the attention of Anheuser Busch InBev, which took an 31.4% ownership stake in the small brewer in 2016 as part of a licensing and distribution deal.

BUD also had the right to acquire the rest of BREW for $24.50/share through August 23, 2019, but with BREW shares trading around $14 on the open market, the World’s largest brewer declined to exercise its option – which would have cost around $475M – and chose to instead pay the contractual $20M surrender charge.

The two companies will continue to collaborate under the terms of the 2016 agreement.
BREW shares immediately sunk to below $10/share where they continue to trade today, badly lagging the performance of the beverage industry and the S&P 500.

In a beer segment with minimal growth prospects, Craft Beer Alliance is just not a very exciting place to be. The company’s best prospect was BUD exercising the option. Now that we know that’s not happening, it doesn’t make sense for investors to own this Zack’s Rank #5 (Strong Sell) stock.

Consider this as well – the owner of 31.4% of the outstanding shares just declined to purchase more. Who knows when BUD might decide to sell their original holdings as well.

The beer market is a tough place to be right now, but interested investors would be better off looking at European Carlsberg AS (CABGY), a Zacks Rank #2 (BUY) or Boston Beer Company, a Zacks Rank #3 (Hold).

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