The Trades:

Buy to open the December 21, 2018 put on MGP Ingredients (NSDQ: MGPI) with a strike price of $75 at $4.20 or lower. Symbol (MGPI181221P75)

Buy to open the December 21, 2018 put on Boston Beer Works (NYSE: SAM) with a strike price of $250.00 at $5.50 or lower. Symbol (SAM181221P250) *the spread is unusually wide on these puts so please be patient with your fill

Buy to open the January 18, 2019 put on Molson Coors Brewing Company (NYSE: TAP) with a strike price of $60.00 at $2.40 or lower. Symbol (TAP190118P60)

Rationale:

An explosion of supply from craft beer and spirit producers continues to hurt large producers. Despite a multitude of acquisitions, it is becoming increasingly difficult for these companies to grow their top and bottom lines.

Total beer sales in the U.S. have not grown materially while supply has increased dramatically. Brewery count in the U.S. was 1,025 versus 185 in 1999. Roughly 8,000 permits for new breweries initiated in 2017.

Spirit sales, particularly bourbon, whiskey, and rye are following a similar trend.

The pie is not growing fast enough to compensate for the flood of new producers in both craft beer and craft spirits. And while companies like Molson and Boston Beer add spiked seltzer, flavored ciders, and craft beers to their line-up, they are cannibalizing their own sales while attempting to staunch the loss of market share.  

MGP Ingredients (NSDQ: MGPI) stock has risen from $17 to $78 on the back of supply agreements of distilled spirit ingredients to large and small whiskey and bourbon makers. Industry reports note that significant distilling capacity has come on board in the past year and will continue in 2019. This in-house capacity takes business away from MGP.

Despite the tremendous growth in the “dark” spirits end markets, MGP’s overall revenue is growing only in the single digit range. Management touts new company-owned brands as the key to future success. Competing with its own customers seems like a last ditch effort to put excess capacity to use.

Profits are down 2% in the first half of this year yet the stock trades at a P/E of 39.

MGP reports on or about November 1, 2018.

Boston Beer Company (NYSE: SAM) has risen like a phoenix from the ashes in 2018 after its sales fell for two years partly due to the popularity of craft beer. Net revenue has rebounded due to the introduction of Truly Spiked & Sparkling beverages and rose cider products.

However, part of that growth is due to a decline in the excise tax rate, which will remain flat in 2019 and is limited to a certain volume of barrels. SAM’s sales growth is correlated with higher sales and marketing expenses and lower gross profit margins, indications that the company must provide discounts to distributors to ensure revenue growth.

Boston Beer Company reports its Q3 on October 25, 2018, after the market close.

Molson Coors Brewing Company (NYSE: TAP) has been unable to grow sales since lapping around its purchase of Miller in the fourth quarter of 2016. Estimates for slight growth look optimistic. More than 70% of TAP’s profits are generated in the U.S., where craft beer and spirits’ popularity is stealing share from mainstream beer.

Even after employing all the helpful “adjustments” from management, profits fell 4% in Q2 18 on a 2.4% drop in beer volume. Part of the problem for Molson is that when your top two beer brands (Miller Lite and Coors Lite) already hold the #3 and #2 spots for market share, they are most likely to lose the most sale dollars as newcomers flood the market. TAP’s 2016 purchase of 2016 helped to temporarily mask this loss.

Molson Coors Brewing Company reports on October 31, 2018, before the market open.

Note: I purposely avoided Constellation Brands (NYSE: STZ), whose stock holds a certain cache in the market due to its recent increased investment in marijuana producer Canopy Growth.

Constellation reports next Thursday, October 4th. While most of the discussion will likely revolve around the Canopy investment, I expect basic beer and spirit sales to disappoint.