Microbrews Without The Froth

Once the toast of Wall Street, U.S. microbrewers--young companies that produce specialty beer at regional breweries--have lost more than two- thirds of their market value since a pack of them went public in late 1995, as earnings have disappointed investors. Pyramid Breweries, which PaineWebber took public at 19 on Dec. 12, 1995, now trades at 3. And Pete's Brewing, taken public at 18 by Morgan Stanley on Nov. 11, 1995, is at 4. Forever lost causes?

Not to investment manager Vince Carino, who sees microbreweries as a prime investment opportunity. The president of Brookhaven Capital has acquired shares in several of these pariahs. His top picks, in which he has taken a 5% stake: Boston Beer (SAM), down to 9 from its initial public offering price of 20 in November, 1995, and RedHook Ale Brewery (HOOK), down to 6 from its IPO price of 17 in August, 1995.

"We look for industries or groups in distress that we think are near a recovery phase," says Carino. He thinks both Boston Beer and RedHook, trading at a huge discount to their book values, are likely to double in price in a year.

Carino expects Boston Beer, which makes such brands as Samuel Adams, Oregon Original, and Long Shot at facilities in five states, "will be the first to rebound--in an industry that's now in transition." With microbreweries on the verge of stabilizing, and with capacity and demand about to come into balance, "Boston Beer--which has the best brand names--will be able to turn around faster," argues Carino. He figures that the company will earn $1 a share next year, vs. an estimated 41 cents in 1998. It earned 37 cents in 1997.

Carino is betting that Anheuser-Busch, which owns 25% of RedHook, will move to acquire the rest of this producer of nine styles of beer. Carino speculates that Anheuser could make a bid of 11 to 12 for the shares it doesn't already own.

RedHook, which posted a loss of 18 cents a share for 1997 on sales of $38 million, is expected to be in the red again this year. But Carino thinks it will turn a profit next year. RedHook CEO Paul Shipman notes a standstill pact limiting Anheuser's stake at 25% will run out in October of next year. "But if Anheuser comes to the board to suggest a change, we will consider it," he adds.

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