This beer stock is a buy; so is its beer

After a big beer conference, the presidents of all the breweries decide to have a drink in the bar. The president of Labatt orders a Blue, the president of Molson orders a Canadian, the president of Sleeman orders a Stroh’s. Asked what he wants to drink, the president of Brick Brewing orders a club soda! “Why didn’t you order a Waterloo?” his colleagues ask. “Naah. If you guys won’t drink beer, then neither will I.”

Consumer_Goods_StocksApocryphal, certainly. But Brick is the largest Canadian-owned brewer in Ontario, now that the other three have been acquired by huge global breweries.

And Brick’s four core craft beers—Waterloo Dark, IPA, Amber and Pilsner—were all recently recognized with gold medals for product quality at the international product quality awards, Monde Selection, in Brussels, Belgium.

Brick Brewing (TSX—BRB) is expected to earn substantially more this year and next. It pays decent dividends that are growing. Brick remains a buy for further long-term, share-price gains, as well as decent and growing dividends, but only if you can accept buying a stock that we rate as speculative.

Brick produces “premium quality and value beers . . . was the first craft brewery to start up in Ontario . . . utilizes its leading edge brewing, blending and packaging capabilities to provide an extensive array of contract manufacturing services in beer, coolers and ciders.”

Hefty P/E ratio may be justified

In the year to January 31, 2018, Brick’s earnings are expected to grow by more than 27 per cent, to 14 cents a share. Based on this estimate, the stock trades at a hefty price-to-earnings, or P/E, ratio of 27.6 times.

Next year, Brick’s earnings are expected to grow by over 21 per cent, to 17 cents a share. Based on this estimate, the stock trades at a better, but still hefty, P/E ratio of 22.7 times. Provided that the company’s earnings per share keep growing quickly, they will eventually justify the higher price. Indeed, the MGI (or Marpep Growth Index) of 1.0 suggests that Brick’s shares are fairly valued.

Brick began paying dividends in fiscal 2016, when it paid a penny a share. Last year it raised its dividend to a nickel a share. This year it raised it again, to six cents a share. The rising dividend is a positive indicator.

We expect Brick to keep raising its dividend. That’s because its earnings continue to climb. In addition, with a net debt-to-cash-flow ratio of only one time, the company has financial flexibility, even as it pays dividends.

The consensus recommendation of two analysts that follow the stock is that Brick is a strong buy.

We rate Brick Brewing a buy for further long-term share price gains, as well as decent and growing dividends. Should anything go seriously wrong or not as well as expected, the P/E ratio would likely shrink. Buy, if you can accept buying a stock that we rate speculative.   

This is an edited version of an article that was originally published for subscribers in the August 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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