Craft Beer Still Seen Taking Alcohol Share Despite Growth Slowdown

Commenting on the craft beer and beverage sector, Stifel analyst Mark Swartzberg told investors that craft beer continues to take alcohol share despite growth slowing down, while craft spirits sales are growing faster than craft beer sales in their infancy. Given competition and current valuation, the analyst initiated coverage of Boston Beer (SAM), Craft Brew Alliance (BREW) and MGP Ingredients (MGPI) with a Hold rating.

CRAFT BEER AND SPIRITS: In a research note to investors, Stifel's Swartzberg pointed out that the craft beer category has exhibited considerable growth over the last decade, but noted that heightened competitive intensity is eroding leading craft brewer shares. Craft beer growth has slowed but continues to take alcohol share, while craft spirits sales are growing faster than craft beer sales in their infancy, he contended, adding that he sees craft spirits having "considerable runway" and fuel for growth. Swartzberg pointed out that craft beer's largest participants are increasingly focused on a portfolio approach to national presence, focusing especially on localities and regions for a given craft brewery's growth. He believes AB InBev (BUD) is the best positioned among the U.S.'s four largest strategics to continue this strategy and expects private equity participants to remain active but restrained in the segment too.

BOSTON BEER TAKEOUT UNLIKELY: Stifel's Swartzberg started coverage of Boston Beer with a Hold rating and $166 price target saying that while momentum argues against a Sell recommendation, the shares are expensive since a takeout is unlikely, improving trends could be fleeting, and brewing utilization pressures margins as volumes weaken. The analyst is also concerned the company's brewing footprint is too big. Additionally, Swartzberg noted that a CEO change seemingly compounds risk of fundamental disappointment if improvement is short-lived, but he thinks CEO Martin Roper's intent to stay until February 2018, or such later date as he and his successor agree, demonstrates his commitment to the next CEO's effectiveness.

CRAFT BREW FUTURE UNCERTAIN: The analyst also started coverage of Craft Brew Alliance with a Hold rating and $19 price target saying that an AB InBev offer for the company is not entirely probable, given that it is not dependent on Craft Brew to execute its craft strategy and a deal may be not be possible either due to Craft Brew's desire to remain independent or to the July 2016 consent decree between AB InBev and the U.S. Department of Justice. Swartzberg noted that Craft Brew entered into a set of commercial arrangements with AB InBev, and added that he believes the former is amenable to an offer by the latter, given the implied premium and the likelihood that foregone AB InBev agreements compound the category headwinds that Craft Brew currently faces.

EXPECTATIONS FOR MGP TOO HIGH: Stifel's Swartzberg also started coverage of MGP Ingredients, a producer and supplier of distilled spirits including bourbon and rye whiskeys, vodka and gin, with a Hold rating and $73 price target. Growth expectations are up a lot this year, making it difficult to keep outperforming, he said. Nonetheless, he thinks the market is right to expect more high single-digit growth with major improvements in margins and cash flow.

PRICE ACTION: In afternoon trading, shares of Boston Beer have gained about 1% to $186.40, and MGP Ingredients is flat at $74.86. Meanwhile, Craft Brew has dropped 3% to $18.95.

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