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What are we looking for?

An attractive growth investment in the brewing industry.

The screen

Back in July, the U.S. Department of Justice ruled that it would allow the merger between Belgium's Anheuser-Busch InBev SA and London-based SABMiller PLC to move forward in the United States.

This was one of the last major regulatory hurdles for the merger between the world's two largest brewers, which is the largest beer merger in history. The beer industry was already concentrated before the merger, with the five largest brewers accounting for more than 50 per cent of sales worldwide. Now, the combined AB InBev/SABMiller entity represents more than 30 per cent of global market share. The motivation for consolidation in the industry is to achieve better economies of scale as consumers, at least in the developed world, are drinking less beer.

And yet there is one segment of the market that is showing impressive growth. The United States is experiencing a craft beer renaissance: Although overall beer sales fell in 2015, sales of U.S. craft beer increased by 13 per cent.

In Canada, AB InBev controls 28 per cent of the market, and another giant acquirer – Molson Coors Brewing Co. – accounts for 25 per cent, but there are some promising microbrewers looking to join the party.

  • First, we look for strong earnings growth. We filter for companies whose earnings have grown over the past year, and are projected to continue to grow through next year.
  • Second, we want to make sure management is controlling costs. Growth in sales only leads to returns for investors if profit margins aren’t eroding. We look for companies whose pretax profit margins have increased from the previous fiscal year.
  • Finally, we look at whether the business is being operated efficiently. In this case, we quantify “efficiency” by looking at return on equity and we take only companies whose current ROE are greater than their five-year averages.

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What did we find?

Of all of the brewers in the world, only eight pass this screen. Six are, not surprisingly, from the growing beer markets of Asia and Africa, but one – Brick Brewing Co. Ltd. – is Canadian.

Last week (Sept. 9), Brick, located in Kitchener-Waterloo, Ont., reported record quarterly earnings. This comes on the heels of a successful summer launch of Landshark Lager and a 20-per-cent increase in year-over-year sales of its draft label, Waterloo. Brick's brands are primarily distributed through retailer The Beer Store, but they are increasing their presence at the Liquor Control Board of Ontario. They also have 100-per-cent penetration in Ontario's first 60 grocery stores licensed to sell beer, and should benefit from this year's increase to 130 stores.

Disclosure: The author personally owns shares in Brick Brewing.

Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

Select brewers showing growth