Craft Brewer Watchlist: Craft Brew Alliance Inc (BREW), Boston Beer Co Inc (SAM)

Consumer goods companies (CGCs), once they are well established within a specific geographic area, constitute durable cash machines. That’s the reason why so many investors (like Warren Buffett) pay such high earning multiples to own them. Once a CGC has built strong distribution networks within its area, it has also built a competitive advantage that is extremely difficult to defeat. This is reason to explain why international companies such as Anheuser-Busch InBev NV (ADR) (NYSE:BUD) rather buy established national champions to start new companies from scratch when they go into new markets.

Boston Beer Co Inc (NYSE:SAM)The natural consolidation process I see in all CGC segments has been particularly strong in the beer business. It not only happens internationally but also within the US. For years now, companies have been buying one another. Nowadays the market seems quiet concentrated since just one player (BUD) controls 40% of the market. That said, new trends in the beer industry have permitted a whole segment of the industry to emerge. Craft beer makers such as Craft Brew Alliance Inc (NASDAQ:BREW) or Boston Beer Co Inc (NYSE:SAM) are surging fast and M&A activity is always latent. In other words, they always are potential M&A targets. As a passive investor, those companies might be interesting propositions if the price they are selling for in the public market is below the price a beer giant would pay to take it private.

The case for Craft Brew Alliance Inc (NASDAQ:BREW) is special. The company is growing fast but a significant share of its volume is sold in exclusive pubs or restaurants the company controls. In a few words, the company has found a way to push volume creating its own demand. Craft Brew Alliance Inc (NASDAQ:BREW) is growing its top line at a 12% year-over-year (YoY) rate and has a great brand such as Kona which is growing sales at rates well above 25% YoY. Craft’s other brands like Redhook and Widmer Brothers are growing slower but they already have some brand equity into them. The company doesn’t seem overly expensive selling at 2013 11x EV/EBITDA, but with a market capitalization of $125 million, it seems too small for a giant like BUD. BREW could be acquired by not only a bigger brewer but also by a Private Equity (PE) firm looking to ameliorate its seemingly low 8% EBITDA margin (BUD’s EBITDA margin is above 39%). The fact that BREW is almost debt free would make it an even more attractive M&A candidate for a medium sized PE firm. My opinion on this name is that it is going to be taken private at some point and at a slightly higher EV/EBITDA multiple. Though, nobody knows when and time is very valuable.

Boston Beer Co Inc (NYSE:SAM) is a different story. Despite its top line growth of 12% YoY, Boston Beer Co Inc (NYSE:SAM) is a much more developed company. The company’s main brand, Samuel Adams, has been a hit for many years along the US east and west coasts and has tremendous brand equity value. With a market capitalization of $1.9 billion and an enterprise value (EV) of $1.8 billion, the company sits on the deal sweet spot of any major brewery looking to complete an acquisition. Besides, its 19% EBITDA margin, leaves a lot of room for improvement to the potential buyer. Of course the market acknowledges all this and, according to my estimates, SAM trades at 2013 14x EV/EBITDA. Is it there any room for appreciation if an M&A deal is around the corner? I bet the answer is yes but its not going to be significant. Again, time is not a free commodity in this world.

Craft Brew Alliance Inc (NASDAQ:BREW) and Boston Beer Co Inc (NYSE:SAM) are both clear M&A target candidates in a cash rich industry that is always consolidating itself. They both offer a lot of room for margin improvement, but they are also fairly valued and they don’t pay any cash dividend. I would keep them in my watch list just in case Mr. Market offers them at a deep discount at some point in time. My view would be “stay out until the opportunity comes along.”

The article Craft Brewer Watchlist originally appeared on Fool.com and is written by Federico Zaldua.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.