Sentiment for BREW? Always 5 o'clock Somewhere

Doug Thomas of Jet Equity Partners LP released his analysis of NASDAQ - BREW on Friday which included some analytics using our Earnings Call Tracker. While the image above wasn't part of Doug's post, it sums up our mission analyzing earnings calls for tone, sentiment and topic signals. I've included his post in it's entirety below.

Craft Brew Alliance (BREW): You Ain't Seen Nothing Yet

8 December 2017

We are reiterating our positive view of Craft Brew Alliance (NASDAQ - BREW - $18.30), the Portland (OR)-based maker of Kona, Redhook Ale, Widmer Brothers and Omission, the #1 gluten-free beer in the country. Even with its shares up nearly 50 percent since we last recommended it in March, the company has put together an impressive string of quarterly results and management appears increasingly confident that the best is yet to come. (And don't just take our word for it; our view is borne out by Boulder Equity Analytics' new artificial intelligence platform that peruses text for specific language, tone and sentiment - it was the first time we've experimented with such a technology).

Despite an incredibly competitive environment - in both the craft category and in liquor as a whole - and an inexplicable weakening in demand by Californians for all things alcoholic, Craft Brew experienced depletion rates for its best-selling Kona brand of nine percent in the quarter. Overall sales, margins and profit all rose nicely over a year ago (up 3 percent, up 350 bps and up 14 percent, respectively).

For the third straight quarter, CEO Andy Thomas' message was resoundingly consistent (something the Boulder folks picked up on too), citing "parting clouds, sunny skies and a bright outlook." Clearly, the success management has had in reshaping its portfolio, rationalizing its geographic footprint and pruning its cost base (the company announced a few days ago a deal to sell its Woodinville (WA) brewery for $24.5 million) is beginning to pay big dividends.

And, yet, we haven't even begun to see much in the way of the substantial benefits that should accrue from BREW's tie-up with Anheuser-Busch, which while structured as a distribution agreement could eventually morph into an acquisition (AB already owns around a third of Craft Brew's roughly 19.4 million shares). As we've written, the two companies last August restructured the terms of their deal, the highlight of which is an offer by A-B to buy BREW for at least $22-$24.50 per share. Also under the terms of the agreement, A-B will pay $14 million in incentive payments through 2018 and then, if it hasn't made an offer to buy the whole company by then, another $20 million in 2019 (that's a total of $34 million).

Because of the timing of the agreement, Kona was not fully integrated into this season's A-B wholesaler plans, which typically start to get put together over the summer. Those plans, which include a significant incentive-based sales component, along with A-B's ramping up of Kona production at its Fort Collins (CO) plant, ensure substantially better top- and bottom-line results in 2018. Analysts forecast EPS will double from $0.14 to $0.30 next year on a better than six percent rise in revenues, to $224 million. It's also worth noting that, as is often the case with "emerging sponsorship"-type names, BREW has been attracting increased institutional interest, including two new fairly high profile sell-side analysts (six of us now follow the company).

It's been a bumpy road for BREW, but the transformational efforts undertaken by CEO Andy Thomas are finally bearing fruit. In an extraordinarily crowded and dynamic market (there are now 8,000 craft breweries in the U.S. vs. 1,500 just a few years ago), Craft Brew's portfolio of brands is well-positioned to thrive. We believe shares will trade higher as investors become more acquainted with the looming benefits of the A-B tie-up, and we see little reason why (not withstanding tougher anti-trust scrutiny) A-B wouldn't eventually want to own the company.

[For those of you interested in seeing how AI might be able to help the active management cause, I encourage you to call Frank Walczak at Boulder, 732.768.4521. Boulder uses a Tableau Software platform that allows users to analyze the language and tone in conference calls. While the user experience can sometimes be a bit frustrating, the software yields an enormous amount of valuable information helpful in determining the messages inherent in one of the key tools used by managements and investors to gauge a company's progress.]

Doug Thomas

#investing #finance #linguistics #textanalytics #artificialintelligence

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