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Thursday, July 31, 1997
Redhook Ale
Brewery, Inc. HOW DID IT FIND TROUBLE? Redhook Ale Brewery shares have been in trouble for a long time. A look at the stock chart is pretty depressing for those who bought the shares over the last few years. Anyone who bought at that time deserves a beer. What is going on here? Everyone is drinking craft beers these days, aren't they? Indeed they are, the problem is that they aren't drinking more Redhook. In the last quarterly earnings report, year-over-year barrels shipped volume was just about flat. Earnings have been dropping, and the company has missed estimates four quarters in a row. Redhook hasn't been alone in the land of trouble. BOSTON BEER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAM)") else Response.Write("(NYSE: SAM)") end if %> and PETE'S BREWING CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIKD)") else Response.Write("(Nasdaq: WIKD)") end if %> have also languished. Flat sales, declining earnings, earnings disappointments, and a laggard sector have combined to send Redhook shareholders to the pub to drown their sorrows. BUSINESS DESCRIPTION Redhook Ale Brewing Co. is one of several craft beer companies that has come public in the past few years. The company is headquartered in Seattle and brews a full line of craft beers out of three microbreweries, two in Washington state and one in Portsmouth, New Hampshire. ANHEUSER-BUSCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> owns 25% of the company and assists Redhook with distribution. FINANCIAL FACTS Income Statement
12-month sales: $39.4 million
12-month income: $0.6 million
12-month EPS: $0.18
Profit Margin: 1.5%
Market Cap: $67.6 million
Balance Sheet
Cash: $2 million
Current Assets: $6 million
Current Liabilities: $5.8 million
Long-term Debt: $10.2 million
Ratios
Price-to-earnings: 41.7
Price-to-sales: 1.7
HOW COULD YOU HAVE SEEN IT COMING? Remember the cockroach theory? In a study published back in the 1970s, Latane and colleagues found that firms reporting negative earnings surprises underperformed in subsequent months, and they noted that one surprise strongly correlated with subsequent negative surprises (like cockroaches, you rarely see only one). Once Redhook started missing estimates, the chance for trouble increased. In a nice piece published in the Lunchtime News last October, Randy Befumo (TMF Templr) noted that the craft brewers were struggling and, in Redhook's case, still looked overvalued. In my opinion though, the real problem for the individual investor was the over optimism of the analysts. With Redhook trading at $13 or so on January 1, the YPEG valuation was $18. Since that time, earnings estimates have been reduced sharply. It just shows that analysts get caught up in hype as well. Good beer doesn't necessarily make a good stock. WHERE TO FROM HERE? Because of a recent negative quarter, the stock cannot be PEGed. A YPEG valuation based on estimates of $0.32 for the next fiscal year and projected 23% long-term growth comes to $7 and change. Right about today's price. But since the analysts have been wrong about Redhook in the past, who knows how reliable the YPEG is. On top of that, the price/sales ratio of 1.7 is 50% higher than that of Boston Beer Co., while margins are less and return on equity is much less. If an investor really wanted to own a craft brewer, Boston Beer Co. looks healthier. Boston Beer even reported an upside earnings surprise recently. If investors want a craft brewer in their portfolios, they might want to consider giving Redhook the hook and taking a close look at Boston Beer Co. -Mark Weaver, MD ([email protected])
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