Craft beer hits Wall Street… Drink up the profits

Long gone are the days of the snobby craft beer. What was once a hobby for backyard brewmasters is now roaring into the financial world in a big way. Constellation Brands ($STZ) is one of the leading alcoholic beverage companies rivaling the likes of AB-InBev ($BUD), and Molson Coors Brewing ($TAP), and just continued on its quest to expand its holdings in the high-end craft beer brewing segment by purchasing Four Corners Brewing, LLC. Financial terms of the deal weren’t disclosed per company press release, but we can assume that the deal will help add to the incredible cash machine that is $STZ.

According to industry analysis, Four Corners has the capacity to produce 25,000 barrels per year of beer, and estimates for 2017 production clock in at ~11,500 barrels. The average craft beer barrel sells for between $130-$170 per half-barrel (full keg), so our estimates would put Four Corners sales between $2.9M-$3.9M. Using a 2x revenue multiple for the sale, we could see STZ spending between $5-$10M for this acquisition.

Constellation Brands is not a stranger to the craft and high-end beer stage, with its current brand portfolio including Ballast Point Brewing and Funky Buddha Brewing, as well as some specialty investments in marijuana focused beverages through its nearly $200M investment in Canopy Growth Corp in Canada last year.

What this means for you

Constellation has a fairly decent reputation for bringing solid cash players to the market, with sales of $7.7B and a market cap of $41.6B (By comparison, $BUD and $TAP have sales of $56B and $10.89B, respectively). Look for them to continue adding smaller, higher margin beer brands to their managed portfolio, and increase cash flow through these laser focused acquisitions.

How you make money

A trading price of $200+ per share ($217.98 as of EoM on 7/10/18) means it could be out of reach for most investors, at least on an individual basis. Instead, take a look at options for this one. Analyst consensus has a price target of $250+ for the stock, with the 5 YR Discounted Cash Flow valuation clocking in at $253.39. An 18 JAN 19 $260 CALL is $1.85 per option, and controlling 500 shares (5 contracts) would cost $925. The stock hitting $255 by November 3rd, 2018 would see a resulting value of $2650 net, or a 286% return on your money (brokerage fees might affect this final number).

Also, if this is something that you do see value in, buying and holding for dividends could also be a strategy as part of a long term, fixed income value portfolio. People will always drink alcohol, and a $2.96 annual dividend per share could be part of a diversified income portfolio.

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