BOSTON (TheStreet) -- Craft Brewers Alliance( HOOK), maker of Redhook, and Boston Beer Co. (SAM) - Get Report, seller of the Samuel Adams brands, are the best ways to play the still-escalating craft-beer revolution.


S&P 500

has fallen 7% this year. Even comparatively safe blue-chip stocks have been battered. The

Dow Jones Industrial Average

has slumped 6%. Yet, shares of Craft Brewers Alliance have doubled and those of Boston Beer have surged 42%. Although valuations are stretched, these companies offer recession-resistant growth.

The bullish case for Craft Brewers was outlined in last week's


column. That for Boston Beer follows.

After earning an MBA at Harvard, Jim Koch worked at

Boston Consulting Group

. He founded Boston Beer in 1984 and perfected the Boston Lager recipe, which he found in a trunk in his father's attic, in 1985. Months later, the fledgling brew was named America's Best Beer. In 26 years, Boston Beer has risen from an anonymous craft brewery to the country's largest American-owned brewery. The expansion is attributable to a relentless pursuit of quality.

Although Germany is home to prominent brewers, it faces competition from the craft movement. During the past five years, Boston Beer has won more awards in international beer-tasting competitions than any other brewery in the world. Accusations of overexpansion are misguided. The company's market share is impressive relative to that of rivals, but it still only accounts for a half percent of the domestic beer market.

Beverage titans

Anheuser-Busch InBev

(BUD) - Get Report


SAB Miller



Molson Coors Brewing

(TAP) - Get Report

are surrendering market share to smaller brewers. While acquisitions are a way to combat this trend, its persistence appears inevitable. During 2009, craft beer shipments increased 7.9%. The previous annual growth rate was 5.9%, so expansion is accelerating. As a percentage of total beer shipped, craft crept up from 4% to 4.3% in 2009.

Of note: Craft was the only domestic market segment that achieved growth in 2009. Boston Beer, despite being among the largest craft brewers, is growing rapidly. During the past three years, which were marked by recession, it increased revenue 12% annually, on average, and boosted earnings per share 18% a year. Its stock achieved annualized gains of 17% over the same span, outperforming U.S. benchmarks.

In the latest quarter, Boston Beer's net income more than quadrupled to $6.3 million, or 44 cents, as revenue climbed 16% to $94 million. The operating margin extended from 4.1% to 11%. Boston Beer boasts an ideal financial position. It holds $39 million of cash and carries no long-term debt. First-quarter core shipment volume increased 17%, boosted by the introduction of the new spring seasonal Noble Pils.

As the recovery accelerates, Boston Beer is hoping to continue to ensnare new drinkers. It spent $3.2 million more on advertising, promotional and selling during the first quarter than it did in the year-earlier period. CEO Martin Roper said the company is "prepared to forsake some earnings in the short term in order to make appropriate investments in brand-building activities to position us well for future growth."

Despite caution, management increased its 2010 earnings-per-share forecast to a range of $2.65 to $2.95. If it is able to hit the high-end of its target, then it currently trades at a multiple of 22. Analysts expect Boston Beer to post adjusted earnings of $2.90 in 2010, less than the upper end of guidance, and $3.25 in 2011, equaling a multiple of 20. Cleary, the recent run-up has pushed Boston Beer shares to a premium.

The stock's trailing price-to-earnings ratio of 26, price-to-book ratio of 5.4 and price-to-cash-flow ratio of 15 reflect premiums of 49%, 18% and 24% to respective beverage peer averages. But the stock's PEG ratio, a measure of value relative to predicted long-run growth, of 0.8 signals a 20% discount to fair value. Still, analysts provide a cautious outlook for the stock.

Of researchers covering Boston Beer, one, or 20%, advises purchasing its shares and four recommend holding them. None rate the stock "sell."



offers a target of $73, leaving a potential return of 10%.

Goldman Sachs

(GS) - Get Report

values the stock at $66, implying that it is fairly priced.

Deutsche Bank

(DB) - Get Report

, which rates Boston Beer a "hold," offers a target of $60, roughly 9% less than the current market price.

Institutional owners lessened exposure to Boston Beer during the first quarter. Of the stock's 15 largest owners, nine, including


(BLK) - Get Report

and Goldman, sold shares while one held steady. Five, including

State Street

(STT) - Get Report


Neuberger Berman

, added to their holdings. Boston Beer recently completed a $140 million share-buyback program, but the board then extended the buyback expenditure limit to $165 million.

-- Reported by Jake Lynch in Boston.


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