Special Report: Craft Distilling: The Hottest Trend in the Liquor Business (And the One Way to Play It)

The craft beer sector has absolutely exploded. I could probably make an argument that it’s actually peaking right now.

But the craft liquor market is just getting started.

It’s heating up in a big way. And it’s time to get in.

Despite the craft beer craze, beer lost a portion of its share of U.S. alcohol revenue in 2015 to liquor for the sixth consecutive year and the 12th time in the past 15 years.

Trends shift. And right now, the booze market is trending toward liquor (as opposed to beer and wine) in general and toward craft liquor in particular.

Jose Cuervo IPO

The signs are everywhere.

Jose Cuervo just went public in February 2017 with an IPO of approximately $900 million. It had been private since 1758.

A whiskey ETF was just launched in Fall 2016.

There’s clear appetite for liquor equities.

That whiskey ETF, for example, counts Diageo (23%), Pernod Ricard (12%), and Brown-Forman (6%) among its top holdings. Those are multibillion-dollar behemoths that own some of the world’s top brands like Captain Morgan, Smirnoff, Tanqueray, Jack Daniels, and more...

But that’s not where the liquor growth is coming from. Instead, it’s coming from high-end, local craft distillers.

There's a way to play that market.

And one way is with Eastside Distilling, Inc. (NASDAQ: ESDI)...

Why Craft? Why Eastside?Craft Spirit Launches

New research from analytics firm Mintel finds that craft spirit debuts have increased by some 265% globally between 2011 and 2015 and that around half of the growth was driven by U.S. craft distillers.

According to the Wall Street Journal from March 2017:

Don't look now, but American whiskeys are gaining ground on Scotland's finest...

Up until about five years ago, you'd have been hard pressed to find an American single-malt—the term for a whiskey (or, in Scotland, whisky) made from malted barley at a single distillery. But U.S. distillers are fast learning they have several advantages in this category. The Pacific Northwest is a world-class growing region for two-row barley, the variety used in Scotland. Scotch whisky is traditionally aged in used oak barrels—a practice that significantly extends aging time. Stateside, most distillers use the new charred-oak barrels bourbon is aged in, yielding a spirit that's smooth, rich and ready for consumption after as little as two years' time, compared with 10 or more for Scotch.

Distilleries are tinkering with cask materials, yeast strains, and barley varieties as they begin defining a distinctly American style:

Craft Spirit Segment Growth
That defines the opportunity with Eastside exactly — a small craft distiller in the Pacific Northwest that has award-winning spirits.

Eastside Distilling also happens to be a very well-run public company with fast-growing sales and highly strategic shareholders that I think could rise by many multiples if it executes as planned during this craft liquor boom.

Here’s just a taste of what it's been up to:

  • In January 2017, it hired Sandstrom Partners to increase its brand value and to accelerate its sales. Sandstrom is an industry tour de force, having also been hired to brand Bulleit Bourbon, Miller High Life, Bacardi Rum, and all the big brand owners that I mentioned earlier like Brown-Forman and Diageo. (See past Sandstrom work here.)

  • In February 2017, it doubled its number of local Portland tasting rooms from two to four. This is just one way that it's enhancing its “local” branding, driving its word-of-mouth sales, and testing its new products. The rooms are open to the public, but Eastside also hosts large private events.

  • In March 2017, it acquired MotherLode Craft Distillery based in Portland, Oregon — a provider of bottling services and production support for craft distilleries. Eastside is planning to relocate much of its own operations to MotherLode's facility and jointly expand both companies' manufacturing resources. Plans are in place for a pneumatic bottling line, allowing for a five-time increase in bottling rate and a large volume spirit handling capability. It's expecting to be immediately accretive to earnings and to reduce costs by more than $200,000 per annum. The acquisition also moves Eastside into the “private label” side of the business.

Things are moving forward quickly. More on Eastside's brands in a bit...

The company just announced its first 1,000-case month for its Portland Potato Vodka — an all-time record for one-month case sales of the brand. This is the vodka that just won a gold medal and best of category award at the 2017 Los Angeles International Spirits Competition.

The company also reported its third-quarter financial results. Gross revenue was up 12% to $895,182, while case volume was up 55%, led by the vodka. Gross revenue for the nine months ending on September 30, 2017, increased 28% to over $2.60 million, compared to over $2.04 million in the same period a year ago.

But here’s the thing: While these numbers are good and are clearly an improvement over previous quarters, they don’t include any sales from the newly relaunched bourbons. Since the rebranding wasn't complete yet, the Eastside sales team was unable to sell the new products during the third quarter.

While still not complete, we do know that the West End Blend, Burnside Oregon Oaked, and Goose Hollow Reserve bourbons have been rebranded and are ready to hit the shelves. So, moving forward, the numbers should be even better.

And while all of this is exciting, there was another announcement included in the quarterly financials that I don’t think the market is fully appreciating yet.Redneck Riviera Whiskey

Eastside has formed a subsidiary called Redneck Riviera Whiskey Co. That on its own would be insignificant until you know that Eastside will share equity in that subsidiary with multiplatinum American country music star John Rich — one half of the duo Big & Rich. You may know one of the band's more popular songs “Save a Horse (Ride a Cowboy).”

Big & Rich own a chain of bars called Redneck Riviera with locations currently in Nashville, Tennessee, and Las Vegas. John Rich will be using his star power and bars to drive sales of the new whiskey that Eastside is making, called Redneck Riviera Whiskey.

Rich has licensed the brand and “will share equity in the brand itself and benefit from the increased value of the brand...”

Eastside now has the star power that could go a long way in elevating the visibility of its brand. Imagine Big & Rich drinking Redneck Riviera onstage every night in front of thousands...

Eastside Distilling’s sales have been growing very quickly.

It will likely do $4 million–$5 million in revenue this year as it expands into more states. And it is only trading with a market cap at around $20 million, giving it little value for its upcoming expansion.

Acquisitions in this space are typically done at a 5–15 multiple, which should see Eastside valued at up to $75 million based on 2017 sales — not the higher numbers expected for next year:

Eastside State Distribution
Eastside has a portfolio of 14 different spirits, but it will be focusing on, at least initially, the growth of its Burnside Oregon Oaked Bourbon and its Portland Potato Vodka — the latter of which saw an 88% growth in its case sales last year.

Eastside Distilling brands
(Click to Enlarge)

With Sandstrom leading the marketing, Eastside will be hitting all the buzzwords like “local," “craft,” and “gluten-free.” The bottles and labels are being redesigned, as well.

And Eastside will also be touting its master distiller, Mel Heim, who took home a double gold medal for his Burnside Oregon Oaked Bourbon at the prestigious 2016 New York World Wine & Spirits Competition.

Here’s what else the company is planning for this year:

  • New product launches in the super premium category.

  • Using its award-winning Oregon Oak (Garryana Oak) barrel finishing to differentiate its bourbons as unique and premium products.

  • Potently "disruptive" ventures in e-commerce.

  • Targeting high-growth segments like bourbon and flavored whiskey.

  • Stoking growth in high margin products like Portland Potato Vodka.

  • Cost reductions and margin building from economies of scale.

  • Realization of benefits from its spirit branding experts, Sandstorm Partners.

  • Expansion in private labeling under the leadership of Allen Barteld via the recent acquisition of MotherLode Craft Spirits.

The Deal

Back in October 2016, the company consolidated its shares 20:1, significantly reducing the number of its outstanding shares. It now only has 4.82 million shares outstanding. Many of those are owned by insiders and strategic shareholders. I'm estimating that there are only several hundred thousand shares available to trade.

It's an extremely tight share structure that could go higher very quickly. It’s also a very real business in a hot sector with fast-growing sales. Many things are in its favor...

I'm recommending the purchase of Eastside Distilling (NASDAQ: ESDI) shares up to $5 in the open market. Please stick strictly to that limit. As I said, there aren't many shares out there, and we don't want to blow the stock up.

You can see the company's most recent corporate presentation here.

And you can check out some of the spirits that Eastside has available for sale online by clicking here. If you live in one of the 22 states that it ships to, go ahead and try out a bottle or two.

Eastside Online Sales
(Click to See Eastside Products Available for Online Sale)

Click here for the webcast of a recent conference call held for discussing Eastside's recent financial results.

As for beer, there are still ways to play that market, as well...

Beer Barons

While craft brewing continues building market share, major players are remaining relevant. And they're determined to maintain their places at the top.

Anheuser-Busch InBev (NYSE: BUD) was already the biggest beer company in the world when it acquired the world's second-biggest brewer, SABMiller, for $107 billion last fall.

AB InBev is now a $200 billion juggernaut that holds the No. 1 or No. 2 positions in 24 of the world’s 30 biggest beer markets.

Its brands include Budweiser, Stella Artois, and Beck's — among others.

It's also dipped into the craft beer market.

Since 2011, AB InBev has purchased Goose Island Brewery in Chicago, Blue Point Brewing in New York, 10 Barrel Brewing in Oregon, Elysian Brewing Company in Washington, and Virtue Cider in Fennville, Michigan.

Indeed, many craft brewers have been in the crosshairs of “Big Beer” that, having failed to compete against them, has decided to simply buy the craft brewers out.

US Beer SalesConstellation Brands (NYSE: STZ), proprietor of Corona Extra, Modelo Especial, Negro Modelo, and Victoria beer brands (and also Svedka vodka and many wines), recently paid $1 billion for Ballast Point Beer — a popular craft brewer out of San Diego.

Since most craft brewers are privately owned, this trend can be difficult to profit from. However, there are still a few microcap microbrewers, such as Big Rock Brewery (OTC: BRBMF) and Appalachian Mountain Brewery (OTC: HOPS).

Big Rock is based in Canada. Its principal operations are in Alberta, but the company is continuing to expand in Ontario and also recently opened a new brewpub and brewery in Vancouver, British Columbia.

Big Rock recorded an 8% increase in sales last year. However, the company still lost a little over $1 million. The stock shot up as much as 678% at one point on the Toronto Stock Exchange.

Appalachian Mountain is based in Boone, North Carolina. It not only makes craft beer, but it's also going full millennial with an added focus on sustainability, community, and philanthropy.

Its revenue increased a staggering 79% last year, to $1.7 million, and production surged 330%.

The company's stock is up a staggering 11,664% since it started trading in 2012.

This was largely achieved through its partnership with the Craft Brew Alliance (NASDAQ: BREW).

The Craft Brew Alliance is another craft brewing company that brews, brands, and markets American craft beers. Its own brands include Kona, Widmer Brothers, Redhook, Omission, KCCO beer, and Square Mile Cider. The company also operates five pubs.

The Craft Brew Alliance is larger and more stable than Big Rock and Appalachian Mountain. Its operations are broader, and its stock is up more than 200% since launching in 2009.

Of course, getting back to the buyout binge, AB InBev owns nearly a third of the Craft Brew Alliance, too.

Other big names to be aware of include Molson Coors Brewing Company (NYSE: TAP), Heineken (OTC: HEINY), and The Boston Beer Company (NYSE: SAM).

Molson Coors has the Molson and Coors brands, obviously, and also Blue Moon. It also bought San Diego’s Saint Archer Brewing Company. Interestingly, Molson Coors stock has jumped 30% over the past year, and its net profit almost doubled in the most recent quarter.

In addition to its namesake brand, Heineken owns Tecate, Dos Equis, Lagunitas, and Red Stripe.

And finally, let's not forget the quintessential craft beer Sam Adams — a product of The Boston Beer Company. The craft beer company has built one of the most recognizable brands in the beer market, and its stock has soared more than 465% over the past 10 years.

So, when it comes to beer, there's no shortage of brewers to invest in.

But you're still probably better off with liquor...

Call it like you see it,

Nick Hodge Signature

Nick Hodge
Editor, Early Advantage

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