Craft Brew Alliance A Buy With Buffalo Wild Wings Partnership And International Expansion

Publicly traded Craft Brew Alliance (BREW) is the owner of three key craft beer brands. The company, through two mergers, owns the brands Redhook, Widmer, and Kona. One of those brands (Redhook) has a partnership coming with Buffalo Wild Wings that could create coverage of the company's stock and blow revenue estimates out of the water.

Redhook and Buffalo Wild Wings (BWLD) will launch Game Changer Ale in July, as part of a new alcohol menu at all of the restaurant chain's locations. Buffalo Wild Wings CEO Sally Smith had this to say, "Draft beer is another cornerstone of our brand. We continue to create new opportunities to enhance the draft beer experience for our guests, increase our beer sales and improve our draft beer margins."

This is a huge partnership for Redhook, as Buffalo Wild Wings has over 900 locations nationwide. The inclusion of the new beer in all 900 stores brings a huge initial base for the new brand and also helps establish a nationwide partnership with Buffalo Wild Wings. The restaurant chain is the number one draft account for over fifty beer brands nationwide, and could become the biggest sales representation for Redhook within a year.

This isn't the first time Redhook has created beer specific brands. Recently, the company launched Audible Ale, inspired by the Dan Patrick Show. Redhook also created a beer, which is the official drink of the Seattle Sounders soccer team's fans. Another key to this is the increasing importance on the Redhook brand. While Kona, a Hawaiian beer, is being rapidly spread across more United States retail points, Redhook remains a big opportunity.

In the fourth quarter of 2012, Redhook was the smallest of the three Craft Brew Alliance brands, in terms of revenue. Redhook made up only 28% of sales, while Widmer and Kona made up 39% and 33% respectively. In the fourth quarter, sales of Kona and Redhook also saw the biggest sales gains with 34% and 10% increases respectively.

This deal with Buffalo Wild W! ings should increase sales of Redhook's other beer brands and help the oldest of the three brands return to the forefront for the company. The deal may also help get Kona and Widmer beers into more Buffalo Wild Wings restaurants.

In 2012, Craft Brew Alliance ranked fourth in the craft retail segment (food/drug/convenience stores), with sales of $103 million. Coming in first place was Boston Beer (SAM) with sales of $251 million. Despite this strong showing, Craft Beer has plenty of opportunity to expand throughout the United States.

One of the keys to Craft Brew Alliance's sales growth in 2013 will be international and regional expansion. This is still a small craft brew company and every new deal signed overseas has a tremendous impact on sales and earnings. The company launched the Omission brand in fiscal 2012 and will be ramping up national advertising soon. The advertising will center around the fact that the beers are gluten free.

Craft Brew Alliance regional sales in 2012 were:

· 81.1% West

· 12.0% Southeast

· 3.7% Northeast

· 3.2% Midwest

Compare that to the national averages for craft brewers:

· 39.8% West

· 27.6% Midwest

· 20.8% Southeast

· 11.8% Northeast

This lack of diversification comes despite the fact that Widmer and Redhook products are available in all 50 states. Kona has expanded to be included in 31 states.

In the fourth quarter of 2012, Craft Brew Alliance saw 10% growth in depletions and 13% total sales growth. Total sales increased to $44.9 million. Earnings per share were flat, with a profit of $0.01 per share.

For the full fiscal year, earnings per share came in at $0.13. This is a large decrease from last year's profit of $0.51 per share, but that included one time gains of $0.34. Full year sales were up to $182.0 million. Sales improved 13% for the fiscal year.

Total shipments of the core brands were up 18% in the fourth quarte! r with 16! 8,000 barrels compared to 2012's total of 141,400 in the fourth quarter. For the fiscal year, Craft Brew Alliance shipped 675,300 barrels, an increase of 8%. Craft Brew has a current brewing capacity of 1.08 million barrels at its four breweries.

Here is a look at 2012 shipments (# of barrels) by brand:

Widmer: 264,300, -2.5%Kona: 220,000, +27.3%Redhook: 191,000, +6.5%

As you can see, these shipment totals go along with material earlier in this article. As Kona continues to expand from its base of 31 states, it will see double digit gains in barrels shipped. Also, as Redhook gains entry of its new Game Changer Ale at all 900 Buffalo Wild Wings locations, it should see a large increase in barrels produced and should continue to represent a higher portion of Craft Brew's annual sales.

One area of concern for the company is a decrease in production of draft barrels. In 2012, draft made up 31.8% of sales with 214,800 barrels. This is a drop from 2011 (219,400) and 2010 (227,100). Barrels of bottled beer continues to increase. In 2010, the company made 357,600 barrels, 2011 saw 403,900, while 2012 saw 460,500 barrels. Not only does bottled beer continue to make up a higher percentage, it is gaining in sales, while draft falls. This is another area where the Buffalo Wild Wings deal could have a positive impact.

Craft Brew Alliance has called for 2013 guidance to be fairly aggressive. Depletions are expected to increase 7 to 11% for the year. Gross margins are also expected to rise slightly to a range of 28.5% to 30.5%. Analysts on Yahoo Finance predict the company will post earnings per share of $0.18 in fiscal 2013. The analysts also predict revenue will increase 8.7% to $184.0 million. In 2014, analysts expect earnings per share of $0.27 from $202.0 million in revenue.

Shares of Craft Brew trade at $7.19, placing them towards the high end of fifty two week range ($5.62 to $8.92). Shares traded at $9.26 at the time of the sale of the Goose Island brand stake to Anheuser Busch (BU! D). The c! ompany has improved since that time in its focus on its three core brands and is increasing shareholder value through new initiatives.

Of course, increased sales amongst the three Craft Brew Alliance brands will also be good for Anheuser Busch. The international beer giant owns 32% of the entire company. This large ownership stake was acquired due to Anheuser Busch's previous stakes in both Redhook (25% in 1994) and Widmer (27% in 1997). Anheuser Busch traded distribution of the beers across the country for ownership stakes, which should pay off nicely for the beer giant.

I became more bullish on Craft Brew Alliance recently. The company owns three key brands in the craft brew market and the entry into gluten free beer gives a strong fourth brand as well. With international expansion and new regional expansion, Craft Brew has plenty of growth ahead. The new partnership with Buffalo Wild Wings is the icing on the cake and enough to push shares into the undervalued category. Expect to see analysts get behind shares and raise guidance.

Information from this article came from a March Investor Presentation found here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BREW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)