• Boston Beer Company remains a “Hold” due to its lack of dividend, high valuation, and inconsistent performance despite some growth in specific product segments.
• The company’s recent results show flat revenue, slight margin improvements, and cost redistribution, but no significant positive changes in valuation or appeal.
• The company’s growth potential is limited, with expected single-digit revenue increases, making its current high P/E ratio unjustifiable for investment.
• I recommend waiting for a price drop to around $305/share before considering investment, as current prices do not offer sufficient upside.

Dear readers/followers,

In this article, I’ll be looking at the Boston Beer Company (NYSE:SAM) again. It’s a business that I reviewed roughly 3 months back after the latest results, giving it a “Hold” rating due to what I viewed as a somewhat unimpressive investment prospect. Since that time we’ve seen a slight bit of reversal – nothing strange as such given that the company had dropped significantly prior to this, but still noteworthy in that it actually outperformed the S&P500 by a factor of 2x. It justifies a second look to see if there is a different upside than I originally expected from the business.

In this case, I invest in a lot of different beer and beverage businesses. I focus on European giants like Carlsberg (OTCPK:CABGY) as well as Heineken, both of which I consider to currently be significantly undervalued for the medium and long term, and which are decent positions in my portfolio. I also follow Molson Coors (TAP) and I keep an eye on Anheuser (BUD). Local brews like Swedish Kopparberg are also on my list, but this is really a small one.

And when it comes to spirits, wine, and liquor, well – I invest even more.

So when looking at SAM it wasn’t difficult to me to arrive at a conclusion that the company was inferior in appeal based on valuation to these former companies.

Let’s look at the company’s recent results, my PT, and the potential development to see if a change is necessary here.

Boston Beer – Plenty to like, but also many challenges

So the first challenge for this business is quite simply that you’re looking at a business without a dividend. This might seem nitpicky to some, but when you’re investing in a business without any dividend, your shareholder yield and return is going to be impacted – the money that you get. Typically as the shareholder, everything being equal, a dividend-paying company is more attractive than one that doesn’t. It’s not a no-go if it doesn’t, but it does increase your hurdle.

One of the things I wanted to look at here is if I’ve perhaps been too harsh on the company, and if it upsides trump the risks I saw in a different way than I originally envisioned. On the surface it, this is not the case though. This company’s “stats” specify it as a business that quite often, negatively misses its targets and marks. It also trades at an excessive premium completely dissociated from the typical cheap multiples we find in the sector, without a seeming justification for this being the case (a few reasons can be postulated, which I will specify later). The company’s market cap is small despite this – below $3.2B, and on the surface it, this is a comparatively small player with a few appealing brands that can be pointed to.

The upside comes from the company growing significantly in earnings. 13.9% adjusted EPS growth over time annualized is not in any way poor. But when combined with this business’s downright abysmal valuation history, meaning you could have lost a significant amount of money due to excessive volatility, what this implies to me is to tread carefully.

The company reported 3Q24 about a month and a half ago, and it wasn’t a very good quarter overall. Net revenue was mostly flat, up 0.6%, with Gross margins at just above 46%, and non-GAAP earnings of about $5.35/share, with a non-cash impact of $2.49. However, the telling impacts were on the category side. Demand for many of the company’s products saw volatility. As management states, the typical way of returning cash to shareholders for the business is to do so by growing the business and reinvesting into it rather than payouts. This is all well and good, but a dividend typically enhances this appeal, even a small one.

The company’s guidance reflects a softer near-term picture for beer and beverages, with implementations of strategic initiatives to offset a certain growth downside. The same picture we saw in previous quarters, and also seen in other companies, is making itself known. The company’s decline in core product areas is weighted up by the upside in the company’s growth segments and products, including the aforementioned (in the last article) Twisted Tea and mixed alcoholic drinks, like Hard Mountain Dew brands.

Returns were down – revenue increased only as a product of price increases – and the same is true for the company’s gross margins, up only due to price increases as well. The company cut its advertising budget by 3%, mostly as a result of better efficiencies and cost synergies, with lower salary expenses and benefit expenses due to cuts in the workforce. In short, Boston beer is becoming more efficient, which is of course a good thing for us investors.

However, as this decreases, G&A is up almost the same amount due to increases in professional fees – so it’s more of a cost redistribution than anything else, at least at this time.

On the high level and looking at the company’s filings, things look “okay”. Nothing stands out, no significant increase in any cost item makes itself known here. That’s the good news.

The less-than-good news is that the appeal of the company remains relatively complex. By this, I mean that the valuation is not exactly improved in any meaningful way. Looking at the fundamentals, Boston Beer lacks an IG credit rating. But it’s easy to argue it doesn’t need it. The lack of any long-term debt or debt makes this a non-issue. It also means that the company is an extremely high-equity ratio business – out of $1.4B roughly of total liabilities and equity, the shareholder equity is just north of $1B. That is extremely positive, obviously. It also means that the tangible BV on a per-share basis is over $75/share. But this also highlights how expensive, relatively speaking, this company is.

The company is generally speaking a strong cash flow generator, with well over $100M of FCF every year and plenty of CFO. That CFO is used to primarily reinvest and buy back shares. Over the past 2 years, the company has bought back significant amounts. LTM, the buyback is at $200M, which in terms of shareholder yield net of issuances of common stock and debt downpayment (some remained) comes to a yield of just south of 7%. This isn’t bad, not even bad when you compare it to beer companies. In fact, if the company was trading at $200-$250 I might consider SAM a good investment at this time. As it stands though, I don’t believe the company and the market is properly accounting for the valuation risk of even a high-equity beer company trading at these multiples.

And for that reason, I remain somewhat dubious of the appeal.

Let me show you what I mean.

Boston Beer is an expensive company, especially considering the legacy risk

My issue with the company is as follows. If we assume that the company’s decline and issues with some of its legacy products like beer and Hard Seltzer (which we saw decline in 3Q), persist, then the appeal lies in growth areas, such as Twisted Tea and the like. And to be clear, analysts estimate that the company’s rate of growth from where it doubled 100% in less than 5 years, is over.

The current growth rate is expected to be less than 10% per year in revenues, and it won’t reach even $2.5B in revenues by 2028E, according to current estimates (Source: TIKR.com Paywalled Link).

In comparison, from 2017, when sales were at around $800M, the company almost tripled the sales to 2021. This is what brought about the overvaluation situation we saw earlier in the article. Betting on the company to trade at 30-40x P/E, is in my view betting on the company offering a repeat performance.

I believe this to be extremely unlikely. The company lacks the financial muscles to move in on the market on any brand that would bring this about as an M&A – at least, without tapping debt in an entirely different way than they have before. If they were, say 30-50% leveraged, then I would also lower my PT significantly. The company’s positive leverage situation is one that I have already accounted for in my valuations.

Current estimates are for the GAAP EPS due to improvement in company structure to reach 2021 levels of above $15/share in 2026E again. This might happen. But at the same time, estimates for cash flow are for it not to increase by almost anything compared to the 2023-2024 CFO even until 2027E.

I do not believe this growth journey will continue in the same way. While I do see potential for growth, to my mind this comes to a more single-digit (high) or low double-digit growth rate, and this does not justify a 30-45x P/E from a beer business. The historical valuation for SAM is distorted due to the massive overvaluation seen a few years ago, so even considering that 30-40x P/E means verifying some of this inflation in P/E.

Remember, at its peak the company’s share price was close to $1,300/share. Someone legitimately thought the company worth 114x P/E normalized, despite this being an arguably commoditized beer business – and that’s why I’m so careful. We’re talking about the company that did grow impressively, but that also fell over 90% in 2021 and has grown “okay” since.

My money is on safer producers of beer and spirits – at least at this valuation. What would compel me to invest is the company dropping to around $305/share, where my PT of $306/share would make more sense.

But at over $310/share or $320 where we are now, this company does not warrant a buy from me.

My thesis is as follows.

Thesis

• Boston Beer Company is an attractive mix of growth-oriented portfolio brands and legacy in the form of, among other things, Samuel Adams. The company has previously generated substantial growth and good valuation as a result of it, seeing peaks in 2020 and 2021. However, since then results have been tepid, and the market has reacted accordingly.
• We’re entering a potential growth phase, and this could support a higher share price. However, with zero yield, and EPS yield of less than 3.1%, and a 30-45% negative miss ratio here, the risk for me is too high to invest in Boston Beer Company despite a PT that goes a bit above the current share price.
• I want a 15% annualized upside to the company I invest in, and despite forecasting $306 here, the company would generate only low single-digit returns at this price. I see no scenario where I’d want to put the company higher. Consequently, this company is a “Hold” with a PT of $306 as of December of 2024.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansions/reversions.

If you allow a premium for the company, you can sort of see where it might go, but anything above 23-24x P/E for a beer company like this is well above excessive, and I’d forecast it at no higher than 20x, which is considerably discount to the 20-year average, but where I would “Buy”. That gives us a PT of $306, but with the way things currently are I don’t see enough of an upside to invest here. I favor other businesses, and this view remains as of 3Q24.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CABGY, HEINY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved. I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles. I own the Canadian tickers of all Canadian stocks I write about. Please note that investing in European/Non-US stocks comes with withholding tax risks specific to the company's domicile as well as your personal situation. Investors should always consult a tax professional as to the overall impact of dividend withholding taxes and ways to mitigate these.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here.

The post Boston Beer: Checking My Thesis appeared first on Up2info.com.

• Boston Beer Company has an attractive portfolio but faces challenges in valuation, management, and market positioning, making it a tricky investment at current prices.
• Despite impressive growth in brands like Twisted Tea, the company has underperformed the S&P500 and lacks a dividend, making it less appealing.
• The company’s high P/E ratio and lack of yield present significant risks, with better alternatives available in the market offering safer fundamentals and yield.
• Given the current market conditions and valuation, I rate Boston Beer Company as a “Hold” with a price target of $306, expecting low single-digit returns.

Dear readers/followers,

Given that I review a lot of soda, alcohol, and spirits companies, I get requests from time to time to look at other companies in the sector. One such request was recieved a few weeks back and concerned the Boston Beer Company (NYSE:SAM). So in this article, I figured that I would be looking at what the company might generate or not generate, the fundamentals, and if we could see the company as a decent investment at today’s price.

My overall stance, looking just at the data and the early indicators on the fundamental side and valuation side, is that this is a difficult one – and I’ll show you why that is.

The company has an attractive portfolio and has obviously been around for quite a long time. One of the more popular products is also indicated by the ticker – SAM – namely Samuel Adams, a beer I’ve actually tasted and found to be a pretty good lager (being German, I’m fairly spoiled here, I’ll admit). The problems in the company are not, I would argue, related to the quality of its products, but rather the current business model (the challenges I see in focus on new, growth-oriented products as opposed to legacy), the way it’s valued, and where it’s going from here.

it’s no secret that the Alcohol/Spirits business is incredibly competitive and scale-oriented. That’s why most good companies get M&A’ed by one of the giants eventually. These giants are the ones that I invest in, including Diageo (DEO), Pernod (OTCPK:PRNDY), LVMH (OTCPK:LVMUY), Remy Cointreau, and others.

Smaller producers, which Boston Beer company is by comparison, are always a bit tricky – but let’s see what we have here.

Boston Beer Company – What upside exists for a highly valued Brewer

I’ve been investing in brewers on the NA market for some time. My history here includes Molson Coors (TAP), Anheuser Busch (BUD), and others. Action in these companies and, for the most part, sub-par (not negative) returns have caused me to be fairly careful when it comes to brewers. In today’s day and age, product quality will dictate whether your beer does well, as the BUD catastrophe in terms of marketing a few years ago showed us with $1B estimated in lost sales (Source). In today’s world, it’s about a lot more, and even events that some people characterize as trivial or even logical can cause big backlashes.

Let’s establish first of all that this company has massively underperformed the S&P500. By massively, I mean that SAM is down 25% while the S&P500 is up 34% in a year, meaning a 50%+ difference.

This means that the company might not have much further to fall (depending on what’s caused this underperformance), and we might have an upside here simply from reversal (if the company is about to perform better, or if the valuation makes more sense).

Of course, Boston Beer is much more than just Samuel Adams these days. The company has a number of alcoholic drinks under its belt, focusing on Dogfish Head, Twisted Tea, Seltzer, and the Angry Orchard Brand. It has also diversified with micro- and local breweries across key locations, such as the West Coast and NYC. Some of these brands and new products have seen truly impressive growth, which is what the premiumization of the stock’s former valuation is about in my estimate, back in 2020-2021.

Twisted Tea is a very good example of this. The company is trying to lean on its legacy product strength, like Samuel Adams, while delivering growth from new products like Twisted Tea, Seltzer, and other brands. The problem is that most other companies in the same sector are approaching the growth issues in a very similar way.

Since the company peaked back in -21, it has been down over 70% since that time.

Boston Beer is a company with a $2.7B market cap, generating earnings of between $5-$8/share in adjusted EPS. It lacks an IG rating or any rating, it also lacks a yield, and its current trading is at 32x P/E normalized. Without going into valuation too deeply, because we do that later, I want you to understand that this is a massive premium to the sector, where peers with far better, larger, and safer portfolios trade at almost half that while yielding over 3.5% (Such as Pernod Ricard at my time of purchase, 3.4% now, or Diageo (DEO) which despite going up is still close to 3%). So this company doesn’t exactly have a good valuation position to work from, from the get-go.

On the plus side, the Twisted Tea brand is a success story, and the 2023A period was a bit of a breakout for the brand but also required plenty of marketing capital to be pushed to work here. The company generated impressive returns due to good service levels, improvements in packaging, and other quality factors. Seltzer is “sort of” recovering, but again mostly due to aggressive marketing spend (The Truly brand). Canned Cocktails are also growing, and the company’s brands and varieties here are seeing some good growth – this is the Dogfish head brand.

Overall, the latest annual results showed very good trends, and the company’s legacy segments and products also seem intact.

Looking at 2Q24, the latest results we have to look at are the 2Q24 results released in late July, with 3Q24 around the corner in a few weeks. The results for this quarter were not spectacular, neither were they for the company’s 1H24.

The company, like other businesses in the same sector, saw drops in shipment revenue, net revenue, and near-double-digit decreases in net income, with YTD trends in the same spirit, with the exception of net income which for the first half of the year was up.

On the positive side, SAM is a net cash company. This means it has no debt, meaning the IG rating, or lack thereof, really isn’t an issue. The company also hasn’t been growing inorganically, which is another one in its favor, because it means it doesn’t seem to push for expensive M&A moves (even though some say the company should probably consider this, and sans this, the company might see difficulty providing growth). Ending with almost $220M in net cash, the company is in a very good fundamental position, and I wouldn’t be doing my job if I didn’t very clearly highlight this as a positive.

The company is seeing results of its margin improvement initiatives, seeing 200-250 bps improvement year-over-year, with good cash flow. So the company is acting against the weak sentiment in the current market with operational improvements. Long-term growth for this company has been impressive, and chances are good that growth will continue. However, it’s the quality or source of growth that concerns me. We’ve seen a general ,market-wide decline of interest in legacy products (beer) like, in this case, Samuel Adams, which now makes up a far lower percentage of sales. Not unique for SAM, but SAM is included here (Source).

We’re seeing some company revenue declines here especially, in addition to decreases in some, if not all of the company’s growth brands. Not all brands have these issues – and many of the EU peers have actually started growing their legacy again (Again, Pernod is a good example here). The company also isn’t exactly a winner in EBIT margins, with many companies doing better than this – and with recent figures of 5-7% being below the company’s own average as well.

On an operational basis, I can see an upside for this company and where it might go in the future. So fundamentals and operations aren’t the problem. In fact, for the right price, I would “Buy” this company.

Let’s look at valuation and put a price on it.

Boston Beer – Valuation is difficult, any peer multiple comparison makes no sense

The obvious risk of investing in a company such as this is the excessive valuation. Boston Beer has averages that go up to 30-50x P/E, and that’s not a multiple that I am paying for a company without a yield in this sector, that has seen significant historical trends of negative growth. We might indeed be approaching a point of reversion at this time, but that doesn’t mean that we should head in without knowing what we could get.

The 20-year average for Boston Beer company comes to around 35x P/E (Source: F.A.S.T Graphs Paywalled Link), which is almost 15x above the typical average for a company in this sector.

If we are to forecast the company at this multiple and would consider it fair, your estimated annualized RoR could be as high as 29% per year, or 80% RoR until 2026E. It would also however require a PT of $510/share, and that’s not something I see in the cards for Boston Beer, even if the company will deliver a fair bit of reversal and growth during the next few years.

It all comes down to whether you believe the company’s legacy and growth products will do as well as reverse the company’s earnings trends. But the current quarterly trends speak against such an excessive estimate or positivity, with declining demand for many of its legacy products. I do not believe growth-oriented products like Twisted Tea will be able to make up for the shortfall here. I believe the returns for the company will be significantly more flat than the current estimates here project.

To assist me in my conviction I have market data suggesting that analysts and forecasts go too high at least 30-45% of the time with a 10-20% margin of error on a 1-2 year basis. Add to this the fact that we lack any dividend to cover short-term shortfalls and instability as well as any sort of payout, and we’re seeing a relatively risky play here.

If I held the shares and bought at trough levels of about $265/share, I could be convinced to “Hold” here. At that cost basis, and say a 23-25x P/E, could conceivably see 15% annualized from this company, and with a high conviction we might see such share prices materialize.

Anything else does not make sense to me here. I see far better alternatives in the market with safer fundamentals, yield, and better upside.

My introductory share price for the company thus comes to $306, the 20x P/E for 2026E, but not with anything but a “Hold” despite this because the upside is lacking.

Thesis

• Boston Beer Company is an attractive mix of growth-oriented portfolio brands and legacy in the form of, among other things, Samuel Adams. The company has previously generated substantial growth and good valuation as a result of it, seeing peaks in 2020 and 2021. However, since then results have been tepid, and the market has reacted accordingly.
• We’re entering a potential growth phase, and this could support a higher share price. However, with zero yield, and EPS yield of less than 3.1%, and a 30-45% negative miss ratio here, the risk for me is too high to invest in Boston Beer Company despite a PT that goes a bit above the current share price.
• I want a 15% annualized upside to the company I invest in, and despite forecasting $306 here, the company would generate only low single-digit returns at this price. I see no scenario where I’d want to put the company higher. Consequently, this company is a “Hold” with a PT of $306 as of September/October 2024.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

If you allow a premium for the company, you can sort of see where it might go, but anything above 23-24x P/E for a beer company like this is well above excessive, and I’d forecast it at no higher than 20x, which is considerably discount to the 20-year average, but where I would “Buy”. That gives us a PT of $306, but with the way things currently are I don’t see enough of an upside to invest here. I favor other businesses.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DEO, PRNDY, LVMUY, TAP, REMYF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved.

I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles. I own the Canadian tickers of all Canadian stocks i write about.

Please note that investing in European/Non-US stocks comes with withholding tax risks specific to the company's domicile as well as your personal situation. Investors should always consult a tax professional as to the overall impact of dividend withholding taxes and ways to mitigate these.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here.

The post Boston Beer: A Difficult Company To “Tap” appeared first on Up2info.com.

• Boston Beer continues to struggle with stagnant growth as the weak seltzer market and other brands’ weakness negate continued Twisted Tea momentum.
• Margins have risen well despite stagnant growth as gross margins have recovered partly from the 2021 low.
• Speculation around potential M&A transactions has heated up, potentially providing investors a lifeline. I still believe that a buyout isn’t a very likely base scenario.
• Unless the company merges or is bought out, I believe that the stock is still overvalued by a fair margin.

The Boston Beer Company, Inc. (NYSE:SAM) continues to work towards a recovery into better growth as seltzer sales have broken the prior very high growth, but no signs of a recovery are yet seen. Speculation around potential M&A transactions has also heated up, recently sending the stock up well.

My previous article on the company, “Boston Beer: Needs To Brew Stronger Financials”, focused on the company’s weakly performing earnings and the stock’s way too high valuation. Since the previous article was published on the 13^th of September in 2023, the stock has lost -21% of its value whereas the S&P 500 has returned 24%.

There’s No Growth Recovery in Sight Yet

Boston Beer has recently continued to mainly report a stagnant top line – while Q3 showed a slow revenue growth of 0.9%, Q4 followed with a -12.0% revenue decline ending 2023 revenues at a negative growth of -3.9%. Afterwards, 2024 has started with a growth of 3.9% in Q1 as the strongly performing Twisted Tea brand continued showing momentum with a 21% sales growth in Q1, communicated in the quarter’s earnings call.

For 2024, Boston Beer continues to guide for depletions and shipments percentage change to be flat at the guidance’s mid-point, with price increases attributing 1-2% into revenue growth to show nominal top line growth – the better Q1 growth isn’t expected to carry forward into the rest of 2024 with many other brands continuing to post volume declines.

The Truly Hard Seltzer brand, driver of both Boston Beer’s prior growth and more recent declines, continued to post lower shipment volumes in Q1 – no end is yet in sight for the seltzer brand’s demand recovery as the hard seltzer market’s fast growth has turned upside down. Statista estimates US hard seltzers’ at-home sales to decline by -2.3% in 2024, and to continue falling slowly until a slow recovery from 2027 forward. The seltzer category’s volumes for Boston Beer are expected down in the low teens in 2024 as told in the Q1 earnings call.

With a continued weak seltzer market and a weak volume growth guidance in sight for 2024, a growth recovery shouldn’t be expected anytime soon. The Twisted Tea brand’s growing scale should eventually aid total growth as the brand becomes a larger share of total sales volume, but high growth shouldn’t be expected with many of Boston Beer’s brands underperforming.

Margins See Leverage Despite Continued Weak Volumes

Despite the stagnating revenues, Boston Beer has been able to manage its margins well as SG&A has stayed nearly flat despite high overall inflation, and as the gross margin has been increased very well from the low of 38.8% in 2021 into a current trailing 43.6%. The operating margin has now been expanded into a trailing 7.5%.

The gross margin leverage is attributed to price increases, prior weak gross profit from Truly Vodka Soda, prior third-party contract brewery, and savings in procurement and processing – many of the benefits should be sustainable as Boston Beer has now better adapted to weak demand for the Truly brand.

The mediocre growth should pressure margins over the long term if a growth recovery isn’t achieved, but I believe that good margin leverage is still ahead at least in the short- to mid-term as the trailing gross margin is still way below the historical level. Investors should still note the long-term gross margin deleverage though.

M&A Speculation Heats Up

On the 31^st of May, Boston Beer’s stock rose over 30% at one point as a report came out that Japanese whiskey-maker, Suntory (OTCPK:STBFY), is interested in acquiring Boston Beer. Suntory quickly afterwards told to Bloomberg that the company isn’t in talks to acquire Boston Beer, and Boston Beer put out a press release that the company doesn’t comment on rumors, and focuses on working as an independent company. Boston Beer’s stock only ended up falling by -3% after the rumor was denied by Suntory.

The M&A speculation is still ongoing, as Heineken (OTCQX:HEINY) and Molson Coors (TAP) are speculated to also potentially be interested in merging with Boston Beer. Green Thumb (OTCQX:GTBIF) has expressed interest in a merger, but with more questionable synergies between a cannabis company and alcoholic beverage company, an M&A deal with a company in the same industry is thought to be more likely.

With the heating M&A speculation, Boston Beer’s shareholders could see a way out with some good upside. The stock has been left at a higher level than prior to the speculation arising, though, likely making a potential transaction’s upside weaker for investors. With Boston Beer focusing on working as an independent company, I don’t believe that investors should make M&A upside a base scenario.

The Stock Has Some Downside, Still

I updated my discounted cash flow [DCF] model to update my fair value estimate. I now estimate slightly lower growth at a CAGR of 3.5% from 2023 to 2033 due to the continued stagnant outlook, and 2.0% perpetual growth afterwards.

For the EBIT margin, I estimate leverage into 11.5% through elevated gross margins and some eventual operating leverage from recovering volumes. The estimate is down from 13.0% previously. Boston Beer’s cash flow conversion still looks to be quite good with larger growth investments already mainly behind.

The estimates put Boston Beer’s fair value estimate at $237.91, 20% below the stock price at the time of writing. The stock still has downside after a significant fall as growth is still stagnant. Potential M&A transactions could still pose upside, but as the company has communicated to be focused on working as an independent company, I don’t believe that M&A upside should be investors’ base scenario. Also, as I estimate the stock to have an overvaluation, Boston Beer’s attractiveness to a potential buyer could be low at the current level.

CAPM

A weighted average cost of capital of 9.43% is used in the DCF model, down significantly from 12.50% before due to a lower equity risk premium and beta estimate. The used WACC is derived from a capital asset pricing model:

I continue estimating no long-term debt. To estimate the cost of equity, I use the 10-year bond yield of 4.36% as the risk-free rate. The equity risk premium of 4.60% is Professor Aswath Damodaran’s estimate for the US, updated on the 5^th of January. For the beta, I now use the average of Seeking Alpha’s estimates of Boston Beer’s 1.04, Constellation’s (STZ) 0.60, and Molson Coors’ (TAP) 0.42, creating a total beta of 0.69, as I believe that the prior 1.07 estimate was too high. With a liquidity premium of 0.4% and an ESG addon of 1.5%, the cost of equity and WACC stand at 9.43%.

Takeaway

Boston Beer’s growth looks to continue halted in 2024 as well with seltzer category sales still posing much lower volumes year-over-year, partly negated by continued great Twisted Tea growth. The company has also recently had speculation around it regarding a potential merger or sale of the company, but Suntory has already denied talks with Boston Beer. While the stock has fallen, I believe that it still has downside from my previous article in a base scenario. While the potential of a buyout poses a lifeline and an upside risk, I still note the stock to have a relatively bad risk-to-reward. As such, I remain with a Sell rating for Boston Beer.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• The Boston Beer Company reported its Q1 results ahead of expectations.
• Strong sales of Twisted Tea have helped balance ongoing weakness in the Truly Hard Seltzer brand.
• An outlook for climbing earnings and positive growth support a positive outlook.

The Boston Beer Company Inc (NYSE:SAM) reported its latest quarterly earnings highlighted by a growth rebound and sharply higher margins. The trends mark an important step for the “Samuel Adam’s” brewer, attempting to address what has been a challenging last few years dealing with disappointing sales and the impact of inflationary cost pressures.

We last covered the stock in 2023, taking a bearish view citing the poor results at the time. For what it’s worth, shares are still down from that last article.

Our update today takes a more positive tone with a sense the company is finally moving in the right direction. There is still a lot of work to be done, but several efforts to improve financial efficiency appear to be working. Ultimately, we believe SAM is well-positioned to rally higher going forward.

SAM Earnings Recap

SAM Q1 EPS of $1.04 reversed a loss of -$0.73 in the period last year. Revenue of $426 million was up 3.9% year-over-year and came in $14 million above the average of Wall Street estimates.

The story this quarter was an uptick in shipments, up 0.9% year-over-year and reaching 1.6 million barrels, referring to the quantities sent out to wholesalers, driven by strong momentum from the “Twisted Tea” brand.

Group-wide depletions, describing the volumes sold from distributors to retailers were flat, with that difference between the two metrics explained by distributors moving to build up inventories ahead of the peak summer season.

The top-line growth captured a shifting sales mix and higher average pricing. The gross margin in Q1 at 43.7% improved from 38.0% in the prior year quarter, which was pressured at the time by some one-off charges related to the Trully Vodka Soda rebranding. Boston Beer is also benefiting from lower freight and logistical charges supporting profitability.

Newly appointed CEO, Michael Spillane who took over the role earlier this month projected optimism during the earnings conference call for continued financial momentum.

In terms of guidance, the company expects volumes to be approximately flat for the full year 2024, in a range down to up low single digits from 2023. More favorably, the outlook is for the gross margin between 43% and 45%, which compares to 42.2% last year. The EPS target from $7.00 to $11.00, if achieved at the midpoint, represents an increase of 45% from the $6.21 result in 2023.

A strong point in SAM’s financial profile continues to be its solid balance sheet. The company ended the quarter with $205 million in cash against effectively zero long-term financial debt. Underlying cash flows have supported an ongoing share repurchasing program.

Thee company has bought back $65 million in shares this year and has $202 million remaining under the existing authorization.

What’s Next For SAM?

We mentioned the difficulties Boston Beer has faced which goes back to the pandemic-era sales boom that left a high-line watermark the company has struggled to reclaim.

For context, sales over the last twelve months around $2 billion remain well below the 2021 peak near $2.2 billion. Similarly, the operating income run rate is less than half its record. The trend follows an industry theme where consumers globally have shifted spending patterns drinking less beer overall.

For Boston Beer, a bigger disappointment has been trends in its “Truly Hard Seltzer” brand where category sales declined by 23% in 2023, with another volume drop in “low teens” last quarter.

In this case, the hard seltzer category within beer has sort of fizzled out compared to the craze a few years ago. Truly, in particular, appears to have also lost market share in intense competition. Boston Beer described this dynamic in its last annual report:

Beginning in the latter half of 2021 and continuing into 2023, the category saw sharp declines in volume. The Company believes that the hard seltzer category comprises approximately 6% of United States beer consumption and that the volume comprising the hard seltzer category grew 13% in 2021 and then declined 15% in 2022 and 21% in 2023. This relatively sudden and sharp decline has had a significant impact on the Company’s business.

The point here is to help explain SAM’s stock price disastrous performance over the period. At the same time, the setup also points to the path forward. The company is betting on its “Beyond Beer” strategy, noting stronger growth in Twisted Tea that has at least balanced the ongoing pressures on Truly.

The effort now is to stabilize Truly by better managing the assortment of flavors and focusing on the options that are connecting with consumers. Innovations like non-alcoholic Samuel Adams and the newer “Sun Cruiser” vodka-based beverage showing early success provide upside to what remains significant market opportunities.

By this measure, the strength of Boston Beer is its relative product portfolio diversification that offers the company flexibility to focus on the options that are connecting with consumers.

SAM Stock Price Forecast

While the company is no longer the high-flying growth name it once was, the attraction now is a sense sales and earnings are finally turning the corner with the worst weakness in the past.

Shares of SAM are trading at nearly 30 times forward earnings, a lofty level, but with the understanding that 2024 is a transitional year for the company to get back on its feet.

The earnings multiple becomes more palatable as the top-line rebounds and EPS growth is expected to average above 20% between 2025 and 2026 according to consensus estimates.

The other metric we’re focusing on is SAM’s EV-to-revenue multiple of just 1.6x, the lowest level for the company in the past decade compared to a 3.2x average.

The ability of management to deliver stronger results could go a long way at improving market sentiment and supporting an expansion of these valuation multiples as part of the bullish case for the stock.

Final Thoughts

Our message is that SAM’s outlook has improved which could set the stage for a more sustained rally in the stock. The next several quarters will be critical for the company to confirm its turnaround is making progress as part of a long road to rebuilding investor confidence.

The risks here to consider include the beer industry level challenges and uncertainties at the macro level. A deterioration of consumer spending or a broader economic slowdown would likely pressure sales and force a reassessment of the earnings trajectory. Monitoring points include trends in shipment volumes as well as the gross margin.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SAM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Boston Beer Stock: Time To Take A Sip (Rating Upgrade) appeared first on Up2info.com.

• Boston Beer Company’s hard seltzer brand, Truly, has been impacted by evolving consumer tastes and increased competition.
• The success of Truly was followed by a burst in the hard seltzer market, leading to a decline in sales and market share.
• Despite challenges, Boston Beer Company has the potential to adapt and grow through innovation, strategic partnerships, and entering new beverage categories like RTD.

Introduction

Do you remember hard seltzer?

I sure do. Hanging out at the beach, sitting out at a picnic, cruising around on the boat, a hard seltzer just did the trick. At least it used to…

But now more than ever, I find myself gravitating towards ready-to-drink beverages or avoiding alcohol entirely. This shift away from hard seltzer has impacted one public company more than almost any other: Boston Beer Company (NYSE:SAM), maker of the Truly Hard Seltzer brand.

Recognized for its influential role in the craft beer movement, particularly through its Sam Adams brand, Boston Beer ventured into the hard seltzer market early on in 2016 as part of its strategic diversification. For a time, the launch of the Truly brand resulted in incredible market success, aligned with a growing consumer preference for lighter, health-conscious alcoholic options.

Nevertheless, evolving consumer tastes and increased competition have shaken the company and had a major financial impact greater than most expected.

In this article, I’ll examine Boston Beer Company’s expansion into the hard seltzer arena, the challenges Boston Beer encountered with the Truly brand, and provide an analysis of the company’s future direction.

Boston Beer Company: Pioneering Brews

Before delving into its tumultuous hard seltzer endeavors, let’s take a brief look back at the roots of the Boston Beer Company. Founded by Jim Koch with a respect for traditional brewing techniques and a pioneering spirit, Boston Beer was at the forefront of the craft beer revolution. Its early commitment to quality and flavor innovation earned it a loyal consumer base and industry acclaim, leading to many referring to Jim as a grandfather of the craft brewery movement.

However, recognizing changing consumer tastes, much like it did with craft beer, Boston Beer Company took a hard pivot away from beer and ventured into the hard seltzer market, identifying it as a burgeoning niche that resonated with health-conscious consumers and those seeking a lighter alternative to traditional beer and ciders.

Truly, alongside the even more popular White Claw, capitalized on the market’s zeitgeist with its flavored offerings and appealing brand persona. The success story of Truly and hard seltzer broadly in 2019-2021 was nothing short of spectacular, with sales and profits soaring to unprecedented heights, and to many, seemed to signal a new era for the company.

In fact, the growth was so strong that at one point, sales were doubling year over year, with the company noting, “Truly continues to generate triple-digit volume growth, and we are continuing to expand package and draft distribution across all channels” in 2020.

The pitch of a 100-calorie beverage, with low/no added sugars and a light flavor that was easy to sip on, just resonated with people.

For a while, it seemed like hard seltzer could not be stopped.

Sales, followed by earnings, rapidly increased as the company doubled in size in a mere matter of months. Such rapid growth led to impressive earnings gains for investors but ultimately, as we shall see, also led to some growing pains.

The Bursting Bubble: Easy Come, Easy Go

Despite the initial triumph of Truly, quite soon, some harsh realities were realized. What was once a blue ocean of opportunity, the hard seltzer market rapidly transformed into a red ocean of cutthroat competition. New entrants flooded the market, each vying for a slice of the lucrative seltzer pie with products almost identical to Truly’s low-calorie, low-flavor spiked seltzer.

Hard seltzer, once a unique selling point (compared to beer), quickly became commoditized as more and more competitors flocked in. Shortly after that, making matters worse, the burgeoning popularity of Ready-To-Drink (RTD) beverages, offering diverse flavors with real spirits, further intensified the competition. High Noon and other such brands began chipping away at Truly’s market share by leveraging what many consumers believed to be superior liquor and flavors.

The result of the increased competition was a stark and swift reversal of fortunes for Truly and Boston Beer– sales plateaued, and the market’s exuberance gave way, leading to a valuation bubble that inevitably burst.

Financial Repercussions and Missteps

Given the scale of its new business line, the downturn in Truly’s fortunes had far-reaching financial implications for Boston Beer Company. The stark contrast between supply and waning demand led to overproduction, culminating in the distressing decision to dispose of surplus stock.

Thousands of gallons of Truly were simply and quite literally poured down the drain.

Earnings per share, once over $15 a share, soon became negative as revenues cratered, and the floor seemingly just fell out. All bets were off.

As a result, the impact on the company’s return on invested capital was profound, prompting introspection about the efficiency and foresight of its investment strategies.

Historically, at Boston Beer, returns on invested capital were around 15% or higher almost every year; after the Truly mishap, returns on capital dropped and never recovered to those same historical levels.

Adaptation and Forward Momentum

But despite these challenges, I believe the fundamental strengths of Boston Beer Company should not be underestimated. The company’s history of innovation, it’s robust brand portfolio, and agility are potent differentiators.

Without a doubt, the lessons learned from the Truly episode will help inform and refine the company’s future strategies. For example, it’ll help them balance their aggressive strategy of entering new niches in the beverage space with safer demand forecasts. This should continue to be useful as they explore new categories like RTD, a category that could be a major growth driver for the wider industry.

According to research from IWSR, “The RTD category is expected to grow by +12% in volume between 2022 and 2027, hitting $40bn by 2027 across 10 key markets. This growth will be driven by the key cocktails/long drinks sub-category and products that sit within the premium-and-above price bracket.”

The company’s endeavors in the RTD segment, such as Dogfish head canned cocktails, potential for strategic partnerships with established spirits brands, and its commitment to expanding its product portfolio to cater to a diverse consumer base indicate a proactive and resilient posture.

Navigating Risks and Seizing Opportunities

According to a recent McKinsey report, there’s a marked shift in Gen Z’s alcohol consumption patterns, veering away from traditional alcoholic beverages towards healthier, nonalcoholic alternatives. Popular choices for Generation Z shoppers include functional and fermented drinks like kombucha, which resonate with Gen Z’s preference for health-benefiting beverages.

These insights from McKinsey indicate a substantial transformation in consumer behavior, driven by heightened health consciousness and changing taste preferences, signaling a major evolution in the beverage industry shaped by the younger generation’s values and lifestyle choices. However, this shift presents notable challenges for companies like the Boston Beer Company. The growing trend of reduced alcohol consumption, particularly among Gen Z and Millennials, is reshaping the industry’s landscape as the increasing preference for moderation or complete abstinence from alcohol alters the market.

In this context, Boston Beer Company’s focus on acquiring and nurturing growth brands becomes even more critical. While somewhat infrequent, Boston Beer has shown they will acquire a business outright. In 2019, The Boston Beer Company acquired Dogfish Head Brewery in a $300 million deal, creating a leading American-owned craft beer platform and preserving its independent status.

Deals like this show that when Boston Beer sees an opportunity to buy its way into a new market or consolidate market share, it is more than happy to do so.

As a smaller company, these transactions can move the needle more significantly than they might for larger companies. Future M&A will be something that I pay close attention to as I weigh a longer-term position in the company.

Conclusion

As mentioned earlier, historically, Boston Beer’s returns on invested capital have been best-in-class, and likewise, its valuation was at or near the top of the pack. Nowadays, its valuation is much, much lower, in line with AB InBev (BUD), despite having returns on invested capital similar to Constellation Brands (STZ) (7.7% vs 7.3%), which has the highest price-to-sales multiple at 4.8X sales.

That’s a strange combination of above-average returns on invested capital with a mere average valuation. I can understand how concerns regarding the Truly debacle may weigh on investors, but the rest of the business still looks strong, and Truly appears to be stabilized.

In conclusion, from my perspective, a bet on Boston Beer is a bet that it can return to its former glory. Given the Truly inflicted trauma, I highly doubt they will repeat the same mistakes.

As such, while I still have some worries, I rate Boston Beer stock a Buy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Boston Beer: Has The Tap Run Dry? appeared first on Up2info.com.

• Since my previous article, Boston Beer’s stock surged, but Q3 2023 sales stayed flat due to Truly’s struggle; Twisted Tea grew strong.
• Focused on Truly, the company faces market challenges, impacting long-term performance.
• Despite a solid balance sheet, Boston Beer’s overvaluation and lagging performance versus peers pose risks.

My previous hold rating for The Boston Beer Company (NYSE:SAM) was due to struggles in its Truly brand and a softened profit outlook amid alcohol market challenges, seemingly affecting Boston Beer more than its industry peers. Since my prior analysis, the stock surged by 8.85%, while short interest dropped from 6.12% to 3.81%. Despite this, in Q3 2023, sales were flat, primarily driven by the underperformance of Truly. On a positive note, Twisted Tea shows strong double-digit growth, excelling in flavoured malt beverages (FMB). However, the persistent financial focus on Truly raises concerns, especially amid enduring market challenges. Furthermore, the stock remains expensive compared to alternatives in the industry. Consequently, my recommendation of a hold rating remains unchanged.

Company updates

Since 2010, global alcohol consumption has plateaued or declined, but the retail value is rising due to premiumisation. 2023 marks the first year that alcohol consumption is predicted to increase again.

Alcohol companies are adapting strategies to meet evolving consumer habits, yielding mixed results. Boston Beer reflects both smart decisions and setbacks impacting overall performance.

Q3 2023 saw a 2.5% YoY decline in sales volume to 2.3 million barrels, urging a need for improved sales and cost-cutting measures, reflected in the appointment of a new CFO. Notably, Boston Beer faces repercussions from its investment in Truly Hard Seltzer, experiencing continued sales decline. Efforts to revive sales in 2024 involve innovation through new packs, flavour enhancements, and seasonal marketing. Conversely, its largest brand, Twisted Tea, excelled with a 34% growth in Q3 2023, fuelled by effective branding, expanded distribution channels, and successful product launches.

The company is banking on the Beyond beer category for faster growth than traditional beer markets. Furthermore, to streamline costs, Boston Beer is scrutinising various business areas, from raw materials and packaging to brewery expansion and waste reduction, aiming to bolster margins. Anticipated capital expenditure of $60 to $90 million focuses on company improvements and capability-building. While these efforts are being made, we have yet to see a major impact on financials, which is concerning; the company is also waiting for FY 2024 until February amidst uncertainty in the market.

Financial updates

In Q3 2023, the company’s top line increased slightly by 0.9% YoY to $601.6 million, hit by an underperforming Hard Seltzers category. Furthermore we can see that TTM revenue is less than FY 2022 revenue at $2.06 billion. Despite this, notable progress was made in enhancing gross profit margins from 43.2% to 45.7% over the last two quarters by optimising operational efficiencies and aligning cost structures with volume expectations.

However, while Q3 2023 net income reached $45.3 million, the trailing twelve-month (TTM) net income of $82.96 million falls notably below industry peers for the same period, indicating a performance gap.

Although a high cash generator with a robust balance sheet showcasing $250 million in operating cash from the last two quarters, the company’s strategic focus on reinvestment and rewarding investors with a $69 million stock repurchase year-to-date underscores its commitment. Ending Q3 2023 with a cash balance of $311 million and an unused credit line of $150 million positions the company favourably for strategic initiatives. However, the discrepancy in net income compared to peers is a concern in a highly competitive industry.

Valuation

When comparing Boston Beer to industry giants like Molson Coors (TAP), Constellation Brands (STZ), and Anheuser-Busch (BUD), evident overvaluation surfaces, notably seen in its forward price-to-earnings ratio of 44.96 and price-to-book ratio of 3.75. Additionally, the company’s growth rate lags behind its peers at a year-on-year rate of 3.59%. Although showing improvement at 42.18%, its gross profit margin still trails all peers except Molson Coors, which stands lower at 36.91%. This indicates potential disparities requiring attention to align with industry standards and competitive positioning.

Risks

Boston Beer faced significant setbacks from costly investments in Truly, which haven’t yielded profitable returns. To counter this, it is initiating changes by phasing out certain products and introducing new ones. However, persisting with a brand that doesn’t align with consumer demands poses a long-term risk, potentially impacting business performance. Additionally, while many alcohol companies are experiencing volume declines, more successful peers excel in boosting top-line revenue. This divergence in performance raises concerns in a dynamic and competitive industry landscape.

Final thoughts

Given recent performance challenges and the ongoing struggle with Truly, Boston Beer faces critical hurdles to overcome in aligning its brands with market demands. While Twisted Tea’s growth signifies some strength, the company’s reliance on underperforming segments continues to hamper overall sales. Furthermore, amidst industry shifts and intensified competition, its valuation appears inflated compared to industry giants. Despite these concerns, Boston Beer’s strategic focus on cost-cutting measures and reinvestment reflects a proactive approach to improving margins and driving growth in a challenging market. Therefore, I maintain a wait-and-see-hold approach.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Flat Sales And Overvaluation: Boston Beer’s Market Dilemma appeared first on Up2info.com.

• Boston Beer Company is facing issues with revenue growth and margins, as many of the company’s brands are facing declining interest from customers.
• The company’s Twisted Tea brand is growing, but Truly Hard Seltzer is struggling with demand.
• Boston Beer’s current valuation doesn’t reflect the issues the company is facing, with a forward price-to-earnings of 42.6.

The Boston Beer Company (NYSE:SAM) manufactures and sells alcoholic drinks in the United States. The company is currently facing issues in both revenue growth and its margins. As I believe that the valuation doesn’t represent the mentioned issues at any level, I believe the stock provides a very poor risk-to-reward – I have a sell rating for the stock.

The Company

Boston Beer produces alcoholic drinks in the United States. The company owns craft beer brands such as Samuel Adams and Dogfish Head. Boston Beer’s brands also include Twisted Tea, Angry Orchard, and Truly Hard Seltzer which sell different low-gravity alcoholic drinks such as siders and alcoholic iced tea. The company also owns local breweries in Los Angeles and New York with Angel City and Coney Island.

The company’s Twisted Tea brand is the company’s fastest-growing, as the brand had a growth of 38% in Q2 according to CEO David Burwick. The brand is trying to achieve further growth through product innovation and marketing.

On the other hand, Boston Beer has issues selling seltzers – Truly Hard Seltzer is facing significant issues in the brand’s demand.

Boston Beer’s stock had a massive run in 2020 and 2021, as the company achieved high growth in the years. With deteriorating financials since the period, the stock has cooled down losing the majority of its value from the stock’s high:

The stock reached a high of around $1350 – the current price of around $377 represents a fall of 72% from the high.

Financials

Boston Beer has achieved a very good amount of growth with minimal acquisitions – from 2002 to 2022, the company only has around $222 million in cash acquisitions, and has been able to grow at a compounded annual rate of 12.0% in the same period:

Although the long-term growth is impressive, I am concerned about the company’s future growth – in 2022, the company only grew by 1.6% despite high inflation. In the first half of 2023, the company’s revenues have even decreased – in Q2, the company’s revenues were 2.1% lower compared to the previous year’s period.

The revenue decreases seem to be fundamentally due to a declining interest by customers in the company’s offering – Boston Beer’s main brand Samuel Adams had decreasing revenues in addition to decreases in brands such as Truly Hard Seltzer and Angry Orchard. Other companies don’t seem to have had such issues in recent quarters – for example, Budweiser had a growth of 7.9% in Q2, Anheuser-Busch had a Q2 growth of 2.2%, and Constellation Brands, a stock that I recently wrote an article on, had a growth of 6.4% in their most recent quarter.

In recent years, Boston Beer has had issues with the company’s EBIT margin – in 2022, the company achieved a margin of 6.0%, well below the company’s typical figures of above ten percent:

The issues are related to a decreasing demand as well as unoptimized operations – the company mentioned in its Q2 earnings call that it is looking for savings in costs such as materials and packaging, a better balance in internal and external production, and logistics. The company still communicates towards a margin expansion in the future – I believe that such a turnaround could happen, as the savings seem to be extensive.

Boston Beer has no interest-bearing debt, and hasn’t had a significant amount in its recent years – the company seems to operate on a safe basis. The company also has a cash balance of around $208 million.

Valuation

Currently, Boston Beer is trading at a forward price-to-earnings ratio of 42.57:

The ratio is higher than the company’s ten-year mean of 34.14. As Boston Beer is facing issues in their demand and has had issues regarding the company’s operating margin and revenue growth, in my opinion, the P/E of 42.57 seems way too high.

To further analyse the stock’s valuation, I constructed a discounted cash flow model in my usual manner. In the model, I expect Boston Beer to have a revenue decrease of -3%, in line with the first half. Going further, my model expects Boston Beer’s demand to do a turnaround – I expect a growth of 7% in 2024, which goes down slowly in steps into a perpetual growth of 2%.

The DCF model also expects Boston Beer to expand its EBIT margin back to a level that’s more in line with the company’s history – although for 2023 the model only has an EBIT margin of 7.4%, the margin slowly grows into a margin of 13.0% in the upcoming years. I believe this increase shouldn’t necessarily be an investor’s baseline scenario, as the company is still facing issues. To illustrate the valuation, though, I modelled a scenario in which the company’s financials recover.

These assumptions along with a cost of capital of 12.50% craft the following DCF model scenario, with an estimated fair value of $181.95, around 52% below the current price:

The used cost of capital is derived from a capital asset pricing model:

As Boston Beer hasn’t held significant long-term debt in a very long time, I estimate that the company won’t leverage debt. On the cost of equity side, I use the United States’ 10-year bond yield of 4.28% as the risk-free rate. The used equity risk premium of 5.91% is Professor Aswath Damodaran’s estimate made in July. Usually, alcohol companies tend to have a low beta, as alcohol consumption tends to stay stable throughout different economic situations. As Boston Beer has quite a low margin, though, I believe TIKR’s beta estimate of 1.07 is reasonable. Finally, I add a small liquidity premium of 0.4% and an ESG-addon of 1.5%, crafting a cost of equity and WACC of 12.50%.

Takeaway

At the current price, Boston Beer seems to be a bad investment. The company is facing issues due to a lower demand for many of its brands. The stock’s current price doesn’t reflect the mentioned issue with an extremely high price-to-earnings ratio and an estimated DCF model downside of 52%. For these reasons, I have a sell rating at the current price.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Boston Beer: Needs To Brew Stronger Financials appeared first on Up2info.com.

• SAM is facing slowing demand and declining margins, as the hype in the craft beer and hard seltzer market has disappeared.
• SAM looks to be a weaker member of the industry, as several brands struggle with maintaining growth.
• We suspect FY23 will be a tough year for the business as it focuses on reinvigorating growth. We do not see an avenue for a return to its pre-Covid margins.
• SAM is expensive relative to its peers, which looks unwarranted given the issues and medium-term outlook.

Investment Thesis

Our current investment thesis is:

• SAM is experiencing slowing growth and margin deterioration, as its reliance on hard seltzer (in particular) and craft beers is weighing on the business as demand declines. The hype train has truly derailed.
• Although the market as a whole is weighing on the business, it is also seeing fundamental issues with its brands, contributing to a refresh of Truly.
• We expect struggles to continue in the coming 12-24 months, as demand remains low and margin pressures continue.

Company Description

Boston Beer Company (NYSE:SAM), founded in 1984, is an American craft brewery known for its flagship brand, Samuel Adams, and a diverse portfolio of high-quality craft beers. The company has established itself as a pioneer and leader in the craft beer movement, delivering innovative flavors and maintaining a strong commitment to quality.

Share Price

SAM’s share price has performed poorly in the last decade, although showed significant promise in the post-Covid period. This promise was due to rapid growth across various non-traditional alcoholic beverage segments, many of which SAM operates within. This has subsequently fallen flat, as the share price illustrates.

Financial Analysis

Presented above is SAM’s financial performance for the last decade.

Revenue & Commercial Factors

SAM’s revenue has grown from $739m in FY13 to $2,070m in LTM Mar23, representing a CAGR of 12%. During this period, SAM has faced volatile growth, with 4 financial years of <6% growth and 6 periods of >15% growth.

Business Model and Competitive Positioning

SAM operates as an independent craft brewer, focusing on producing and distributing a wide range of craft beers, including ales, lagers, seasonal brews, and cider products. The popularity of the business is driven by increased interest in non-traditional brands, and beverage types, with consumers demanding new flavors and premium quality.

SAM employs a multi-brand strategy, with Samuel Adams as its flagship brand, along with other well-known brands such as Angry Orchard, Twisted Tea, and Truly Hard Seltzer. This provides the business with the benefits of diversification while allowing for the exploitation of various beverage types. This said, during the historical period, the company has faced issues across various brands, contributing to the weakness. Recently, SAM has discontinued its Truly Iced Tea brand and has conducted a full refresh of Truly, in order to improve its performance.

As management has described it eloquently, the Hard Seltzer market is entering “the post-hype era” and the business has clearly been caught out. Despite the strong initial performance in the industry, Truly has rapidly fallen behind and is clearly out-of-favor. This is not the first time an improvement has been initiated and so we remain cautious until improvement is clearly shown.

Craft brewers differentiate themselves through product quality, flavor innovation, brand reputation, and unique brewing techniques. Based on our research, the general consensus is that the quality of its products is high. This implies the issue is either marketing or the segment within which it operates. Management is banking on the former, which is the reason for the revitalization of Truly. We are concerned either way. Consumers are notorious for experiencing changes in interest and so trends vary over time. The risk is that some of SAM’s brands have lost interest, which may not be easy to earn back. Either this or they have lost interest in Hard Seltzer, an area of high exposure for SAM.

Competitors vie for shelf space and taps at retail outlets, bars, and restaurants as a means of driving sales. Given the vast array of options, this is a highly competitive aspect of the industry, as direct-to-consumer is not an option. Among our many concerns is that if SAM, and hard Seltzer in general, continues to experience declining demand, we could see a rapid erosion in the offering of these products to consumers.

Operationally, SAM utilizes a combination of its own breweries and contract brewing arrangements to meet demand and maintain flexibility in production. In the most recent quarter, depletion declined 6%, with shipments declining 7.6%, implying a continued QoQ decline. Twisted Tea and Hard Mountain Dew are the only brands showing resilience.

SAM faces competition from other craft brewers such as Sierra Nevada Brewing Company, New Belgium Brewing Company, and Dogfish Head Craft Brewery, among many other micro-breweries.

Overall, there are many concerning characteristics of the current SAM operations. The brands are inherently valuable and the struggling ones cannot be wholly counted out, as trends/tastes rarely develop linearly. This said, SAM is highly exposed to a segment that currently has a hangover and its other segments are not performing that much better. This is not a beverage-wide issue, implying SAM is fundamentally struggling.

Alcoholic Beverage Industry

Without repeating what we have already discussed, the craft beer segment has been on an impressive trajectory, now encompassing a respectable portion of the alcoholic beverage market. The market is estimated to be $22.2bn in size. The reason for the rise was partially due to hype but there is an underlying quality offering here (arguably unlike Hard Seltzer). Beer is the most consumed alcoholic beverage in the world ($623bn market size) and comes second to only Water and Tea. A parallel industry to this, with a premium spin to it, should have continued success in our view. The issue is that the short-term will likely be ugly, as the industry resets to a normalized level.

One factor that could easily change a brand’s fortunes is a successful product release. With weakening financial performance, SAM should not lose sight of this and so continue to introduce new and seasonal offerings to cater to evolving consumer preferences and trends.

Increasing consumer focus on health-conscious consumption has contributed to increased demand for low-calorie alternatives, as well as no-alcohol options. Despite one of the alternatives performing poorly, namely Hard Seltzer, we believe the low-calorie/no-alcohol options could fair far better, providing an opportunity to support underlying growth.

Margins

SAM’s margins have noticeably deteriorated in recent years, falling to a GPM of 41%, EBITDA-M of 9%, and a NIM of 3%.

This rapid capitulation is a reflection of a number of negative factors combined. During this period, we have experienced inflationary pressures, with production costs materially increasing. In conjunction with this, softening demand has been damaging, pressuring the business to keep prices competitive. Further, the company has incurred some one-off costs, such as increased inventory obsolescence, as brand and product changes are made in pursuit of improvement.

Our view is that margins should improve beyond the coming 6-12 months, as operational volatility subsidies and the business attempts to succeed in its various brand pivots. This said, we see no ability to return to its FY20 levels currently, likely landing a few percent above its current EBITDA-M level.

Balance Sheet & Cash Flows

A key positive is that SAM does not utilize debt, providing the business with reduced downside risk as it experiences a difficult FY23. Further, the company has sufficient cash to buffer any issues.

SAM’s cash flows are impressive despite the performance, having shown strong consistency and a comparably high level. This implies there is hope yet with this business, as an investment in reinvigoration can come from SAM’s operations.

Outlook

Presented above is Wall Street’s consensus view on the coming 5 years.

Analysts are expecting growth to return as early as FY24F, although not to the level achieved previously. This looks to be a reasonable estimate, as SAM can spend much of FY23 focused on revitalization. This said, the (2.7)% FY23F growth forecast remains precarious if demand falls further in Q2.

Industry Analysis

Presented above is a comparison of SAM’s growth and profitability to the average of its industry, as defined by Seeking Alpha (7 companies).

SAM’s near-term historical growth is impressive and it is illustrated in the company’s relative performance, overperforming on both a 3Y and Y5 basis.

Profitability, however, is far less attractive. The company is operating at a noticeable deficit to the industry, with only comparability at an FCF level.

Based on this, SAM looks quite unattractive in our view. In a mature industry, profitability is usually more important than growth.

Valuation

SAM is currently trading at 19x LTM EBITDA and 16x NTM EBITDA. This is a discount to its historical average.

A discount is undoubtedly warranted in our view, as its margins have materially declined and growth is slowing to a halt.

We also believe the business is unattractive on a relative basis. The 7 peers are currently trading at an LTM EBITDA multiple of 12x, as well as a NTM P/E of 15x. This premium SAM has looks completely unjustified.

Investors are pricing in a combination of margin improvement and a significant uptick in growth. We currently believe a medium-term EBITDA-M target of 14-15% is reasonable and in conjunction with a growth rate of 5-8% (Slowing demand for non-traditional beverages), we see a 13-14x multiple as justifiable. SAM is currently at 16x on a NTM basis.

Key Risks With Our Thesis

The risks to our current thesis are:

• the potential for economic recovery-led growth. With US inflation approaching a sustainable level, we could see consumer demand improve from early 2024.
• the uncertain bottom. With the industry itself contributing to slowing demand, there is a risk to our bearish view, given the lack of visibility, that the bottom (of the seltzer / craft beer market), with improvements ahead.

Final Thoughts

SAM has performed extremely well to achieve the growth it has but its trajectory has clearly derailed. The company is struggling with both growth and profitability, and the issues are with the business as much as the segments it operates within.

Although we believe Q1’23-Q2’23 will be the bottom of its financial underperformance, improvements will be slow and the struggles will continue.

The defining factor of our sell rating is the inflated valuation, which is seemingly pricing in a strong recovery, which we cannot see.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Boston Beer Company: Experiencing A Hangover As Margins Evaporate appeared first on Up2info.com.

• The Boston Beer Company, Inc. is still suffering from a normalization of demand post the pandemic.
• I am disappointed by the fact that 2023 is another year of “stuck” operations.
• Recognizing the long-term growth potential and occasional momentum run, I am a holder of Boston Beer stock here.

In July of last year, I offered some thoughts on The Boston Beer Company, Inc. (NYSE:SAM) after it saw a massive hangover. The company has seen a huge boom during the pandemic, but managing this actual growth has been tough, after strong demand first introduced massive supply chain issues, followed by stiff competition and volume declines when demand faded.

Even as I called the situation not fully under control, I thought that the prevailing levels looked interesting enough to hold a modest position, as I liked the long-term performance of the business.

Some Perspective

Boston Beer was a key investment darling in the early 2010s, as the business posted double-digit sales and volume growth numbers. This resulted in shares rising from $40 in 2010 to $300 in 2015, and by 2016/2017 the business had seen earnings stagnate around $7 per share, as shares fell back to the $150 mark in response to the growth standstill, or massive growth slowdown.

Pre-pandemic, Boston Beer was a $300 stock, as earnings had risen to about $8-$9 per share, translating into a high earnings multiple, but keep in mind that margins lag that of competition, revealing some upside. With the company acquired Dogfish Head Brewery in a $300 million deal, I was attracted to the addition of these IPA brands to the portfolio.

The pandemic created an unreal situation, with shares having risen to $1,400 per share in spring of 2021, and by last summer shares were back down to $350 per share again. This came after a huge boom-bust cycle with 2020 revenues up 39% to $1.74 billion, as operating earnings rose 68% to $246 million, with net earnings up to $192 million, resulting in earnings of $15 per share.

The company guided for another 40% growth in 2021, with earnings seen between $20 and $24 per share, pushing up shares above $1,000, arguably on the back of stronger earnings but most certainly valuation multiple inflation as well.

In the end, 2021 revenues only rose by 18% to $2.06 billion, as selling, promotion and advertising expenses were up 35%, making that operating earnings were evaporated to $8 million (although this came after a $50 million contract termination and asset impairment charge as well). Moreover, the company posted a big loss in the fourth quarter, providing little inspiration for 2022.

The company originally guided for 4-10% sales growth and earnings between $11 and $16 per share, although the company cut this outlook to earnings between $6 and $11 per share following the release of the second quarter results. Trading at $350, a $4 billion valuation resulted in a non-demanding multiple of 2 times sales, and while earning of $8 per share translated into a higher valuation, there was still the potential for margins to increase (and occasional M&A interest in the business).

Believing that under normal conditions the business should be able to post margins between 10 and 15% of sales, that would work down to a $12-$18 per share number, all while the company held $10 per share in net cash, making it time to rejoin the investment again, although I lacked conviction to hold a full position.

Stuck Here

Fast-forwarding a year from last summer, we have seen shares trade in a $300-$400 range, which included multiple trips to both the lower end and higher end of the range, although we are now near the lower end of the range again at $312 per share.

In February, the company posted its 2022 results with sales up a mere 2% to $2.09 billion as the company posted a GAAP operating profit of $91 million, and that is after a $27 million impairment charge. Adjusted for this charge, earnings came in at $7.07 per share, on the lower end of the revised guidance. Moreover, the company held over $180 million in net cash, despite some minimal share repurchases.

The 2023 guidance was not too comforting with depletion and volumes seen down 2-8%, only in part offset by a 1-3% increase in pricing. This should result in earnings between $6 and $10 per share, setting the company up for another tough year. Capital spending is seen at $100-$140 million, but by now annual deprecation charges have risen to $81 million already, making that net capital investments have been flattening off.

In April, Boston Beer posted a tough first quarter earnings report with sales down 5% to $410 million as a net loss of $9.0 million appeared on the bottom line. Net cash was down to $122 million, due to losses, elevated share buybacks and net capital spending as the company maintained the full year guidance. As this guidance was not too exciting from the get go, it seems that there might be some risks to the guidance.

And Now?

Amidst all these moving trends, I am a little bit disappointed by the performance of The Boston Beer Company, Inc. in this field. Right now, the top line situation is somewhat stable, but the big issue is that in an inflationary environment, the company is not really enjoying pricing power, pressuring margins in a substantial way.

While the situation is stable enough to no longer fear disruption to the business (after earnings and sales imploded to an important extent post-Covid-19), I am disappointed to see another disappointing year in 2023. After all, this came after a tough 2022 already from an earnings point of view. In fact, there might even be downside risks to the current Boston Beer performance this year.

This makes me a holder of a small Boston Beer position here, but I do not see a compelling reason yet to alter this position, although I am happy to keep on a modest position, recognizing the historical volatility and upbeat take on the market at various time on this stock.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SAM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Boston Beer: Nothing To Toast On (Rating Upgrade) appeared first on Up2info.com.

• The Boston Beer Company reported Q1 earnings that missed expectations.
• The company is attempting to deal with declining shipments including weakness in the seltzer category.
• A lack of growth and poor brand dynamics may likely keep shares volatile.

It’s been a tough last few years for The Boston Beer Company, Inc. (NYSE:SAM), still dealing with an apparent post-pandemic hangover. From record profitability back in 2020, the challenge has been slowing beer and seltzer sales against rights costs hitting earnings.

Indeed, shares of SAM are down more than 70% from their all-time high following a string of disappointing results. The company’s latest quarterly report continued that poor streak by missing estimates, working to keep shares near a 52-week low.

While management is projecting some optimism regarding improving conditions going forward, we’re skeptical of any near-term turnaround. In our view, weak growth and a sense that shares remain overvalued should keep shares volatile with risks tilted to the downside.

SAM Q1 Earnings Recap

Boston Beer Company reported a Q1 EPS loss of -$0.73, which came in $0.41 below expectations. Revenue of $410 million, was down by -4.7% year-over-year and was also under the consensus.

The story this quarter was a decrease in the gross margin to 38.0%, from 40.2% in the year prior. This reflected higher brewery processing costs along with an inventory charge based on an effort to rebrand “Truly Vodka Seltzer” to “Truly Vodka Soda”.

The bigger picture was the top-line weakness where shipment volumes in terms of barrels sold at 1.6 million, declined by -7.4% across key brands like “Samuel Adams”, “Angry Orchard”, and “Truly”. These trends were partially offset by higher pricing and moderate shipment gains in “Twisted Tea”.

Even as total expenses ticked lower, aided by a cutback in advertising and promotional activities, the result was a sharply wider operating loss at -$13.9 million compared to -$2.2 million in Q1 2022.

The plan for the company is to focus on stabilizing margins while making adjustments operationally to deal with the softer volumes. Long term, management believes that its portfolio of brands diversified into “beyond beer” categories will exceed market growth rates over time. These were points discussed during the earnings conference call:

We are implementing the operational plans to adjust to a lower volume environment. This includes simplifying our business to reduce needless complexity and improve margins, as well as adjusting our cost structure to be more closely in sync with our volume expectations. These operational plans are on track and should begin to impact our margins positively in the second half of the year.

In terms of guidance, Boston Beer sees shipment volumes for 2023 down between -2% and -8% compared to last year. The company believes the gross margin can get a lift to around 42% for the full year, representing an improvement compared to the result in Q1. Management is targeting EPS between $6.00 and $10.00 for the year, which compares to $7.38 in 2022 or $18.22 in 2020 as a reference point.

What’s Next For SAM?

The first point here is that we see the company’s fundamentals as stable. A strong balance sheet position with over $120 million in net cash means Boston Beer Co has the financial flexibility to make necessary strategy changes and whether near-term headwinds. At the same time, we’re skeptical that any of the announced efforts can begin to move the needle in terms of top-line growth.

Data suggests that the “hard seltzer” category that includes Truly continues to struggle with the boom of consumption observed during the pandemic looking more and more like just a temporary fad. If anything, that reassessment of the market potential explains much of the stock price decline over the period.

Getting sales to stop declining is one thing, but shareholders will need to see evidence of a return to growth, which we don’t see happening. The Truly brand makeover may not be enough in our opinion.

According to consensus estimates, the market sees revenues declining by -3% this year and EPS of $7.28, which is consistent with management guidance. We believe there is some downside to those figures in the context of the latest trends and broader macro environment.

Into 2024, the consensus is for a rebound at the top line by 5% while EPS rebounds sharply towards $10.23 with some momentum follow-through in 2025 and beyond. The way we see it playing out is that a few more quarters this year of weaker-than-expected results would lead to revisions lower to forward estimates.

When we look at SAM, the other dynamic here is that the stock simply appears overvalued relative to peers across several valuation metrics. Even looking at the 2024 EPS estimate implying a 1-year forward P/E of 31x on the stock, SAM trades at a wide premium relative to names like Anheuser-Busch InBev SA/NV (BUD), Molson Coors Beverage (TAP), or Constellation Brands Inc (STZ) averaging closer to 17x.

Historically, the ability of SAM to capture market share in specialty categories and its higher growth could justify these spreads which is no longer the case. Our interpretation is that the stock needs to sell off further to converge closer to fair value.

Final Thoughts

Even with SAM already losing more than half its value over the past two years, we believe there is more downside. This is a case of a major company that made some critical strategy mistakes in recent years, and the efforts to repair the brand still have a long ways to go.

We rate SAM as a sell with a price target of $250 representing a 35x multiple on the consensus EPS estimate for 2023, or 25x based on the current 2024 EPS estimate. The bearish case for the stock is that sales continue to disappoint, while margins remain pressured as Boston Beer company is forced to turn more aggressive with marketing and promotions.

On the upside, investors will want to see stronger top-line momentum as evidence of brand recovery with an improvement in shipments. Monitoring points over the next few quarters include the gross margin and cash flow trends.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Boston Beer: Latest Results Leave A Bitter Taste appeared first on Up2info.com.