My Favorite IPA
Brewer M&A No Reason to Celebrate
It's All About the Can
Whenever I head up to Vermont to visit my family, there are a few things I absolutely have to do. First, I need to stop by my old house, which I still own, but have been renting while we focus on life here in Rhode Island. The house was built in 1849 and, as with most buildings, there is always something to check on or repair to make sure small issues don't turn into big ones.
If there are no pressing projects, then it's onto activities—a hike, a walk in the woods, some x-country skiing or a trip to Mt. Mansfield for real skiing are always on the agenda.
When the fun is done and the sun has set, it's beer time.
I'm not a huge beer guy, but I do enjoy a pint or two with my brother and sister-in-law, parents and any of the old crew that I haven't seen for a while. There's something about earning it that makes it all that much sweeter.
As in most New England towns, there is no shortage of local brews to sample. In fact, there are so many options to choose from that some people find it hard to pick.
But not me. I have three go-to beers: The Alchemist's Heady Topper (American Double IPA, 8.0%), Lawson's Finest Liquids' Sip of Sunshine (American IPA, 8.0%) or Hill Farmstead's Edward (American Pale Ale, 5.2%).
Heady Topper usually gets the nod, but that may be as much from nostalgia as anything—the Alchemist Pub and Brewery was one of my favorite places to get a bite before Hurricane Irene flooded the joint in 2011. Thankfully, the owner had just opened a cannery and their most popular beer flowed relatively uninterrupted.
Edward isn't canned at all. And though Heady Topper and Sip of Sunshine are equally hard to get outside of a taproom due to limited release in 16-ounce cans, I can usually track down enough to get me through a few months before my next trip up to Vermont to restock see my family.
It's no secret that microbrews have been on the rise. But the degree to which their cumulative market share gain is affecting the big boys is still worth mentioning, especially as consolidation at the top of the market is seeking regulatory approval.
Last week, SABMiller (SMBRY) agreed to sell itself to Anheuser-Bush InBev (BUD) for around $108 billion. That price translated into a 50% premium to SABMiller's closing share price on the day before the announcement. As part of the deal, SABMiller will likely sell its 58% share of the MillerCoors joint venture to Molson Coors (TAP), reportedly for $12 billion, which held onto a right of first refusal when it formed the joint venture back in 2008.
These brewers are all so big and internationally diversified that it's hard to say what the final deal will look like once regulators pull out their red pens. And not just regulators here in the U.S.—European, Chinese, African and several Latin American countries will all want to have a crack at reviewing and potentially altering the deal.
If things go through as they're proposed right now, Anheuser-Busch InBev-SABMiller becomes the largest brewer in the world with around 28.2% market share.
Heineken (HEINY), Carlsberg (CABGY) and CR Snow come in at #2, #3 and #4 respectively, and Molson Coors would be in the #5 spot, with around 5.1% market share.
Even with a reshuffle at the top, 43.1% of the beer sold in the world will still come from producers in the rest of the deck. And that's really where the growth is.
According to the Brewers Association trade group, around 700 small, independent breweries opened in the U.S. between June 2014 and June 2015.
That pace of growth suggests 2015 will mark the first time since 1873 when the U.S. will have over 4,131 active breweries.
Even Samual Adams (SAM), which has done a good job of cashing in on the craft beer movement, has felt the pain from the upstart masses. In late October, SAM pulled in its forward earnings guidance and reduced sales forecasts. While the stock still leads the big brewers with a five-year gain of 153%, its year-to-date decline of 28% is the worst in the group over that period.
So, if you're like me and find yourself drinking more of the 43.1%, even if in small amounts, what's the play?
It might be worth looking at the can in your hand. There are basically three can manufacturers that supply small U.S. craft brewers, and it’s estimated that between 2011 and 2014 craft beer volume in cans increased from just 2% to 10%. I don’t know if that growth came purely at the expense of bottled beer, but I suspect with the number of breweries soaring, there was some incremental growth.
With only three can manufacturers out there, they have a defensible market position. In fact, the Brewers Association reported that one of them, Crown Holdings (CCK), recently dropped new and existing customers using 12 oz and/or 16 oz cans. The company is also reported to have pushed out wait times to as long as 18 months.
That's a fairly dramatic step for the second largest supplier by market cap; Pennsylvania-based Crown Holdings has a market cap of $7.3 billion.
I haven't dug deep enough to uncover the source of Crown's logic, but perhaps the reason lies in the pending merger of its two competitors, Ball (BLL) and Rexam (REXMY).
Ball is based in Colorado, has a market cap of $9.2 billion, and pays a 0.8% dividend, while Rexam (REXMY) is based in the U.K., has a market cap $5.9 billion, and pays a 2.2% dividend. Earlier in 2015, Ball extended a $6.8 billion offer to acquire Rexam in a deal that would combine the world's two largest beverage can makers by volume.
None of these three packing companies are growing rapidly, but the beverage industry enjoys steady demand, so over the long-term, investors have tended to do well. Ball, Rexam and Crown are up 110%, 76% and 54%, respectively, over the last five years, as compared to a 69% gain in the S&P 500.
I like Ball the best, probably because I see its logo every time I have a 16 oz can of Heady Topper or Sip of Sunshine. And I also tend to use Ball jars as water glasses (the screw-on lids are a nice feature when you need to run out and want a drink handy). The company only grew sales by 12.3% between 2010 and the end of 2014, but EPS growth of 64% was decent. And if it can close the Rexam deal, there should be significant scale and efficiency gains that would increase the value of the company over time.
That said, it's probably best to watch these stocks until there’s greater clarity on the M&A front. European Union antitrust regulators will make the go or no-go call on the Ball-Rexam deal by December 23, and it's reasonable to expect that they'll consider the proposed Anheuser-Busch InBev-SABMiller deal, as well as possible divestiture of certain of Ball's assets, probably to Crown Holdings.
Once the chips fall, I expect steady demand for cans and (hopefully) greater cost efficiencies will keep Ball rolling. If it can deliver another 110% return over the next five years, then that would be something to raise a pint to.
Your guide to small-cap investing,
Chief Analyst, Cabot Small-Cap Confidential 2.0
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