CRAFT BREW ALLIANCE (NASDAQ: BREW)
Analysts: Leiyi Huang, Purvi Mittal, Harout Sahakian, Rakesh Venkatayogi Presented April 8, 2014
Company Overview
Craft Brew Alliance is a craft beer brewing company with a unique alliance between three craft beer brands:
Widmer Brothers, Red Hook, and Kona. The company has two operating segments that include Beer Related and
Pub Operations. Beer production is spread across 4 breweries located in the states of Oregon, Washington,
Hawaii, and New Hampshire. In these facilities, the annual production capacity is 1,025,000 barrels and the firm
operated at 70% capacity utilization in 2013. The company launched the first every gluten free beer, Omission, in
2012 and continues to expand its product line under the established brands. Craft Brew has a Master Distribution
Agreement with Anheuser Busch (AB) where the company’s beers are distrusted through the AB network across
the United States. Also, AB has 32% ownership of Craft Brew and has board representation.
Current Price
$14.64
Current P/E
138.2
200 Day MA
$13.93
Market Cap.
$281M
Industry Overview
The beer manufacturing industry is very competitive between major international firms to local single product
manufactures. Companies differentiate themselves by taste, price, packing, and ingredients. Beer distribution
occurs primarily through supermarkets and bars, though specialty retailers, restaurants, and convenience stores
play an important role in the market. Who and what a craft brewer is a hotly debated issue today. Essentially, a
craft brewer is one that produces beer with distinctive flavors, in small quantities, and in local market. As the beer
market has struggled recently, craft brewing has been growing strongly with a volume growth of 18% in 2013 and
15% in 2012. In 1980, there were 89 craft breweries compared to 2,483 today. The expected growth in craft beer
revenue is 13% and 9.3% in 2014 and 2015, respectively.
Financial Analysis, Projection and Valuation
For our comparable analysis, we examined firms that produced and sold beer; these included international
companies and major producers. We chose the following companies: Anheuser Busch, Boston Beer, Carlsberg,
Molson Coors, and Heineken. Based on this analysis, we determined the value of BREW shares at $15.21. In
addition, we used a discounted cash flow method based on our sales projections. Our DCF approach priced the
shares at $9.10. Our discount rate used for calculating the DCF was 13%, which included a 1% business risk
premium. Our weighted cost of equity was 12.4% and a cost of debt of 6% with a 96% and 4% weight in WACC,
respectively. We gave a 25% weight to comparable analysis and 75% to DCF – this gave us an estimated share
price for BREW of $10.62.
Discounted Cash Flow
$9.10
Comparable
$15.21
Risks
The major risks for Craft Brew include increased regulation (federal and state), volatility in supply prices
(aluminum, crops, water), changes in consumer tastes, fluctuations in consumer discretionary spending, and
disruptions to the AB agreement or ownership structure.
Recommendation
Add to watch list. We believe the beer industry and Craft Brew Alliance are richly valued at this time. The
company is an advantageous position compared to other craft brewers with its distribution arrangement and
ownership structure through Anheuser Busch. Also, the craft beer industry appears to have greater growth
potential than the overall beer market. At the right price, this stock would be a great addition to the portfolio.
APRIL 6, 2014
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