Beer Maker's Breakout Signals It's an Immediate 'Buy'

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Large beer brewer such as Anheuser-Busch InBev (BUD) and Molson Coors (TAP) may have something to worry about concerning Americans' evolving tastes.

According to the Brewers Association, a trade association representing small and independent American brewers, in 2012, craft brewers' percentage of the U.S. beer market rose to 6.5%, up from 5.7% in 2011. This 15% year-over-year growth stands in stark contrast to the major brewers, which are experiencing flat growth and losing market share.

As craft brewers blossom, the big beer brewers appear to be faltering. In the last two quarters of reported earnings, for example, BUD had two straight negative earnings surprises, falling short of analysts' estimates by 7.9% and 5.1%.

The largest -- and arguably most successful -- U.S. craft brewer is Boston Beer (SAM). While the maker of the popular Samuel Adams brand currently claims only 1% of the total U.S. beer market, it has about 20% market share in the craft beer arena.

The company offers more than 30 styles of beer. As well as beer, its Twisted Tea malt beverages and Angry Orchard hard cider products helped drive revenue growth in 2012. Looking to 2013, the company plans to add to its consumer offerings. It operates a beer incubator known as Alchemy & Science. The subsidiary looks to buy or invest in other craft brewers, or come up with new craft beers on its own.

In 2012, the number of barrels sold increased more than 10% to over 2.7 million, up from about 2.5 million in 2011. For 2013, the company expects depletions and shipments to grow between 10% and 15%. And it is targeting a 1%-2% price increase per barrel to help offset high costs for barley, packaging and other ingredients.

If the company can sustain this growth, it should continue to perform well. From a technical perspective, the stock looks strong.

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SAM Stock Chart

Since hitting an October 2011 low near $71, shares formed a major uptrend, rising about 135% to date.

For nearly all of 2012, the stock was caught in a holding pattern between support around $92 and resistance around $116. This trading activity created a rectangle.

Typically, rectangles resolve in the direction they are entered. In late 2012, shares surged above $116 resistance, climbing nearly $20 in one trading week. An accelerated intermediate-term uptrend line formed from this large price increase.

In February, the stock climbed to the $160 level, then stalled. In mid-March, it touched a new all-time high of $164.52, but again retreated. This trading activity created a second, consecutive rectangle marked by support near $152 and resistance at $164.52.

On Friday, shares hit a new all-time high of $166.79, effectively breaking through the resistance and bullishly completing the second rectangle.

According to the measuring principle for a rectangle, calculated by adding the height of the pattern to the breakout level, the stock could potentially reach a new price target of $176.80 ($164.52-$152.24 = $12.28; $12.28+$164.52 = $176.80). At current levels, this target represents 6.5% potential returns. However, with no resistance in sight, the stock could move higher.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming first quarter, scheduled to be reported May 1, analysts project revenue will rise 15% to $130 million, compared to $113 million in the year-earlier period. For the full 2013 year, analysts expect revenue to increase 13.6% to $659 million, from $580 million in 2012.

The earnings outlook is also solid. In the first quarter, analysts expect higher profit margins will see earnings increase 7% to $0.60, from $0.56 in the comparable year-ago quarter. Over the full 2013 year, management anticipates earnings will rise at least 6.4% to the range of $4.70-$5.10 per share, compared with $4.41 per share last year.

Risks to consider: Rising commodity prices could impact the company's profit margins. In 2012, however, Boston Beer maintained solid operating margins, as its loyal customer base proved willing to pay a premium price for a quality product. I expect this strong loyalty to continue, ensuring robust profitability even if manufacturing costs were to rise.

Recommended Trade Setup:

-- Buy SAM at the market price
-- Set stop-loss at $152.21, slightly below support at the bottom of the rectangle
-- Set price target at $176.80 for a potential 6.4% gain by mid-June

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