What's the first thing investors think about when they hear the words "craft beer?" More often than not, it's likely the Boston Beer Company (NYSE:SAM), makers of Sam Adams lager and other fine beers. However, that's not the only publicly traded craft brewer in America. Out in Portland, Ore., exists the Craft Brewers Alliance (Nasdaq:HOOK), a micro cap selling beer under the Widmer Brothers, Red Hook and Kona brands. Although Craft Brewers Alliance sells about one quarter of the beer Sam Adams does, there are some intriguing reasons to own this small company. (To know more about micro cap company, read: How To Evaluate A Micro-Cap Company.)

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Ownership

The first thing you notice about the company is its close relationship with Anheuser-Busch InBev (NYSE:BUD), which owns 32.2% of its shares. As a result of these close ties, Craft Brewers Alliance, although far smaller than Boston Beer, many believe it technically doesn't qualify as a craft brewer. That's semantics. More importantly, Anheuser-Busch is its main distributor for all of its major markets. Next on the ownership list, are brothers Kurt and Robert Widmer, co-founders of the Widmer brand, who together own 14.6%, and Cameron Healy, founder of Kona, owns another 6.3% of the company through a family trust. Last, but not least, Tim Boyle, CEO of Columbia Sportswear (Nasdaq:COLM) owns another 2.4%. It's a quality collection of successful business people where the best days are probably still in front of them.

In October 2010, the company acquired the Kona Brewing Company for $17.9 million, $6.2 million in cash and $11.7 million in stock valued at $7.02 a share. At the time of the acquisition, Kona was considered Hawaii's largest brewer and the 13th biggest craft brewer in America. This was a deal developed over a nine-year partnership between the two companies, where Craft Brewers Alliance brewed and distributed Kona beer on the mainland. At the time of the deal, Craft Brewers Alliance held a 20% equity stake in Kona valued at $1.2 million. Bringing a third brand in-house, as it were, provides it with a more attractive and diverse offering for wholesalers and retailers across the country, not just in the Pacific Northwest. (To know more about acquisition, read: Analyzing An Acquisition Announcement.)

Goose Island

In May, Craft Brewers Alliance sold its 42% stake in the Fulton Street Brewery, LLC, operating as Goose Island, to Anheuser-Busch for $16.3 million. Anheuser-Busch paid a total of $38.9 million to acquire the Chicago craft brewer. Craft Brewers Alliance originally got involved with Goose Island in 2006, inking a distribution deal that provided the Chicago company with access to the Anheuser-Busch network of independent wholesalers. Of course, the original deal with Goose Island was done through Widmer Brothers Brewing, as the merger with Red Hook didn't take place until July 1, 2008. If ever there were a win-win deal, this would have to be it. Goose Island was able to take its business to the next level, which ultimately led to Anheuser-Busch buying it, while Craft Brewers Alliance was able to take a $5.9 million investment and turn it into a $10.4 million, 176% gain over five years. Not only that, as a result of the deal, Anheuser-Busch lowered the price per case Craft Brewers Alliance paid for distribution from 75 cents to 25 cents until the end of 2018. In certain instances, the fee is waived entirely through September 2013. The savings, approximately $1.8 million a year, will go to further brand promotion.

The third quarter numbers suggests the additional promotional cash is helping. Depletions, which are the sales by wholesalers to the retailers, increased 7.3% in the first nine months of the year with Kona leading the charge, up 31.9% to 135,900 shipments. It's clearly the growth brand for the company. Even more impressive, is the 550 basis point increase in the gross margin, year over year. It's certainly helped improve overall profitability. Operating profits for the first nine months of the year improved 21.1% to $4.9 million on the strength of a 30 basis point increase in operating margins, this despite increased promotional spending. Management expects earnings per share for all of 2011 to be at least 15 cents, excluding the 34 cents gain on the Fulton Brewery sale, a 50% increase year over over. Things are getting very interesting in Oregon.

The Bottom Line

Anheuser-Busch paid approximately 1.4 times sales for Goose Island. Boston Beer and Anheuser-Busch currently trade for 2.6 and 2.4 times sales, respectively. Craft Brewers Alliance has lowered its debt in 2011 by 50%, and is growing handsomely and yet it trades for 0.76 times sales. Below $6, you're looking at an easy double in 18 months to two years with very little downside. Drink up.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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