Craft Brewers: Toasting triple-digit gains
Today's Financial News - Posted August 21, 2009
Vice stocks create a great way to beat a recession. Small-cap vice stock are an even better way. Craft Brewers Alliance (NASDAQ:HOOK) is all the proof we need.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): My neighbor owns a bar. He has twenty acres, half a dozen horses, a brand new truck, a house with two kitchens and is in the midst of putting a fancy, automated gate across his long, winding driveway.
His success is proof that Americans drink in good times and in bad times.
While not all of us are willing to deal with the endless hassles and the lifestyle involved in running a bar, there are ways to take advantage of the nation’s unquenchable thirst.
If you are a small-cap investor, Craft Brewers Alliance (NASDAQ:HOOK) will certainly get your attention. Shares of the not-so-micro-brewer have surged over the last two days, climbing from below $2.75 to $3.80 at the moment. In March, you could have gotten in under a buck.
What’s behind the sudden jump? A stellar earnings report.
Earlier this month, Craft Brewers announced it recorded just over $66 million in revenues during the first half of the year. It translated the sales into a profit of $664,000. Not bad considering the company recorded revenue of $22.4 million during the same period last year.
Obviously a nasty recession has not kept too many folks away from bellying up to the bar.
Any chance of a hangover?
The upside of getting in on a quickly growing brewer are fairly obvious. The growth potential is through the roof. Beer is nearly recession proof. And barriers to entry are large enough to keep the competition at bay.
But what about the downside? What do investors need to know that may not jump out at them right away?
First thought… commodity prices.
Brewing high-quality beer takes a big pile of high-quality raw materials. As energy and commodity prices climb higher and higher, this will have a definite impact on margins.
Another margin-cutting factor is a major problem for almost all up-and-coming manufacturers. Finding the right fit between capacity and output is a difficult task. Many young firms find some cash, build a fancy factory and wait for the orders to fill the assembly line.
The problem with the sudden growth in capacity is if the orders do not come flying in right away, much of the capacity will sit idle. But the company still has to pay for it. For manufacturers with large seasonal fluctuations, this can become a major concern, crushing margins and straining liquidity ratios.
Dig through Craft Brewers’ latest 10-Q and you will see this phenomenon is already hampering margins.
Finally, micro-brews tend to remain popular as long as they are micro-brews. Once customers start viewing the company as just another “corporation,” the appeal dwindles.
That’s why Budweiser has never successfully entered the craft beer market. Drinkers won’t buy the brew no matter how good it tastes.
For Craft Brewers, the future is going to be challenging. But by maintaining a regional stance and watching the company’s capacity utilization, Craft Brewers will be able to continue its growth throughout the next five to ten years.
That means today’s shareholders are likely getting a bargain.
Next Article: TFN eNews 08/21/2009: Will natural gas prices really triple by February?
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