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The Cider House Rules for Brewers

Thursday - 5/16/2013, 3:52pm  ET

There are some places where you can't get a bad meal or a bad drink, Paris, Frisco, New Orleans. When I went to Paris I discovered cidre, apple cider with a kick. It went down all too easy with savory crepes and my friend and I were pleasantly surprised at how much we liked it (a little too much). Now Americans are discovering cidre.

Cidre or hard cider (basically fermented apple juice), appeals to Millennials age 22-29, women who don't care for beer, and those who can't tolerate the gluten in beer, helping it grow from a niche beverage to wider acceptance. Sometimes cider is even called a malternative!

Strangely enough, cider was once the drink of choice in early America, around since Pilgrim days. After losing its prominence after the Civil War with the influx of German immigrants and their brewing prowess beer sales are down and cider is once again gaining favor, now one of the fastest growing alcoholic beverage segments. How the worm has turned. Food historians aver that even before Prohibition the beer companies lobbied for federal regulations to prohibit the sale of cider with preservatives, although wine and beer had no such ban.

The growing popularity of cider is not lost on beer giant Anheuser-Busch InBev which is debuting Stella Artois Cidre after introducing Michelob Light Ultra Cider last spring. They are touting cidre as similar to wine and it can somewhat resemble sparkling wine but cidre tastes like really good American cider. They advise serving it in wine glasses as opposed to beer glasses.

In Paris cider is often served in a heavy glass tumbler as it's really in a beverage category all its own, neither wine nor beer. However, if the cider has an alcohol content of more than 8% it will technically be a wine according to US regulation.

Boston Beer has its own cider brand, Angry Orchard, (what a great name) competing with Anheuser-Busch. Heineken bought British brand Strongbow cider last year and Miller Coors bought Crispin Cider last year. While cider has long been the bailiwick of small craft cidermakers like The Vermont Hard Cider Company which reported 30% growth in sales from 2011 to 2012, the big boys want a piece of the apple pie.

Cidre or hard cider manufacture has drawbacks as listed in Boston Beer's annual report, sourcing the right type of apples, availability and health of the crop, etc. Even now apple trees take over five years (more like seven) to produce enough apples compared to a single summer for barley. Boston Beer sources most of its cider apples from France and Italy. American apples are mainly grown for eating and juice and aren't tart enough.

Which brewers will continue to soar?

TAP Total Return Price data by YCharts

Ciders are currently a tiny percentage of sales for each of these. Boston Beer's total return has outperformed its bigger brethren with the growth of the craft beer movement. Will cider even the score?

Anheuser-Busch as the biggest global brewer will likely benefit least due to size. The company is competing with other major brands like SABMiller and the aforementioned Heineken all participating in an "amber rush" of acquisitions in the industry. It will complete its purchase of Grupo Modelo, famous for Corona beer, by the end of this month. However, it will probably not be accretive until 2014.

The stock has run 35% in the last year and the forward P/E is 17.3 with a 1.9% yield at a 29% payout ratio. Analysts continue to drink it up with 4 strong buys, 3 buys and 1 hold with a median price target of $110.

Anheuser-Busch may have economies of scale but much smaller Molson Coors (market cap $9.16 billion) has 30% of the US beer market and so should see some impact from Crispin Cider. It has the lowest forward P/E of 11.82 and the highest yield of 2.60% with a less sustainable payout ratio of 58%.

Molson Coors is also the slowest grower as analysts predict a sluggish 4.80% five year growth rate (yoy) compared to 9.10% for Anheuser-Busch and 10% for Boston Beer. Analysts are lukewarm on Molson Coors with 2 buys, 6 holds, and 2 underperforms with a median price target of $47.00.

Boston Beer is the smallest of these ($1.88 billion market cap) but has 200 craft beer brands under its belt (talk about a beer belly!). Its Angry Orchard brand is now the number one cider brand in the US and it only took eight months from its launch to take the top spot according to the 2012 annual report. There are also five varieties of Angry Orchard as opposed to the one and two ciders at Molson Coors and Anheuser-Busch respectively.

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