We’ve downgraded Big Rock Brewery to a sell. It pays no dividends, is likely to lose money this year, carries too much debt and is forced to restructure. Sell.
We regularly review Calgary-based consumer stock Big Rock Brewery (TSX—BR). Its shares have plunged and have significant downwards momentum. They could continue to decline. We’ve downgraded Big Rock to a sell.
BR writes: “With brewing operations in Calgary, Vancouver and Toronto, and sales in five Canadian provinces and two territories, Big Rock has been a significant supporter of local Canadian breweries.”
There are strikes against Big Rock
But there are strikes against BR. It’s the only beverage stock on our beverage industry survey that fails to pay a dividend. Nor is it about to pay one anytime soon, if ever.
Sometimes companies pay dividends if they have a strong balance sheet, or they see a business downturn as temporary. On March 31, however, BR held cash of only $50,000. And its net debt-to-cash-flow ratio is more than 3.3 times. That’s above our standard comfort zone of two times or less. So BR lacks the balance sheet strength to pay a dividend.
BR earned five cents a share last year. In the first quarter of 2019, however, it lost 25 cents a share. This is more than four times the loss of six cents a share, a year earlier. True, beer sales increase in the hot summer months. Even so, given the poor start to 2019, we expect BR to lose about 15 cents a share this year. It lacks the earnings from which to pay dividends.
Big Rock is trying to cut its costs
BR sees provincial taxes as a problem. It writes: “The 104% increase in the net Alberta beer mark-up imposed on Big Rock by the previous Government of Alberta in late 2018 (being a 160% increase since 2016) has forced the Corporation’s senior management to take immediate cost-cutting measures as the increase in the tax on Big Rock’s beer in Alberta has eroded the profitability achieved by Big Rock.”
On May 29, BR put in place “significant cost-cutting measures, including reductions to the Corporation’s workforce in response to the persisting regulatory environment for brewers of its size in Alberta”. President and chief executive officer Wayne Arsenault said: “We are creating a sustainable business model by accessing new ways to grow revenues, reduce expenses and improve margins, despite the current tax regime and regulatory environment for beer in Alberta.”
If we’re right and BR loses money this year, then it has no price-to-earnings ratio with which to value its shares. The shares trade below their book value of $5.27 a share. Just keep in mind that BR has intangible assets of nearly $2.4 million, or 34 cents a share. Exclude this and the shares trade at a lower discount to their adjusted book value. Then, too, BR will take one-time restructuring charges. This is likely to further reduce the shareholders’ equity and the book value of the shares.
BR’s price-to-cash-flow ratio is 14.2 times. That’s far above the ratio of five times or less that can indicate an under-valued stock. Sell.
This is an edited version of an article that was originally published for subscribers in the July 26, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846