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Bull of the Day: Boston Beer Co (SAM)

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The beverage industry is a tough place to operate. For every successful brand, there are dozens of failed attempts to produce the new hot item that never quite caught on. In fact, even brands that have become big sellers are never quite safe from seismic shifts in consumer tastes and perceptions.

Those issues are even more significant in the market for alcoholic beverages, but there’s a reduced market size (about ¼ of the population isn’t old enough to legally purchase your products) and a confounding patchwork of regulations regarding packaging, labeling and distribution.

Given the obvious challenges, you might surmise that you’d have to have a screw loose to found a beverage company, and for the most part you’d be correct. Except not in the case of Jim Koch and The Boston Beer Company (SAM).

In 1984 - having already earned a BA, a law degree and an MBA from Harvard – Koch started one of the first “microbreweries” in the US, naming his flagship product Samuel Adams Boston Lager after the founding father who operated a brewery in Boston in the 18th century. The beer gained swift popularity among drinkers who had become bored of more standard offerings from the likes of Anheuser Busch (BUD), Miller and Coors (TAP).

Originally planning to sell about 5,000 barrels of beer annually, by 1995, Koch and Boston Beer were selling millions of barrels and went public at $15/share – appropriately enough (given that their namesake was one of the architects of American democracy) through a subscription offering that gave prospective small investors an equal opportunity to buy shares as big clients of underwriting firms.

Those shares were a great buy, having appreciated better than 2,700% since then.

Countless other small brewers have been bought by international beverage giants over the past decade, but Boston Beer has remained independent – and kept a fiercely dedidacted group of customers in an industry where such loyalty isn’t necessarily common. They’ve also aggressively gotten ahead of other trends that have fueled sharply rising revenues even as overall beer sales in the US have leveled off.

The biggest of those trends lately has been the enormous popularity of spiked seltzer drinks. Flavored bubbly drinks with beer-like levels of alcohol are widely perceived and a healthier alternative because of their lower amounts of calories and carbohydrates.

Boston Beer’s offering in the category is Truly Seltzer and an explosion in sales is fueling revenue growth at Boston Beer despite the fact that sales of Sam Adams and other similar beer products have shown slight declines.

They’re not just making up for lost beer sales however, they’re also attracting customers who might otherwise be buying wine. Wine sales in the US are roughly $70 billion annually, but younger millennial buyers increasingly prefer seltzer drinks to conventional wine products.

Interestingly, while the number of alcoholic beverages consumed by the average American adult fell slightly (by about 7 drinks/year) between 2017 and 2018, overall sales increased by $12 billion – or 5.1%. This would seem to suggest that consumers are buying more expensive premium products instead of the generic products that are often offered at bargain prices. This plays directly to the strengths of Boston Beer - which customers view as a higher quality alternative to mass produced names.

On Wednesday, Boston Beer reported a big increase in sales. Gross revenues for the quarter of $3.1 million easily surpassed the Zacks Consensus Estimate of $277M. Net earnings were worse than expected, with the company earning $1.12/share – considerably lower than the expected $1.42.

Management explained that despite increased sales, the cost of advertising and promotions as well as lower gross margins cut into the bottom line. In after-hours trading, shares declined nearly 10% from Wednesday’s closing price of $429. For investors, that represents a chance to get in at a significant discount.

If you're tempted to "buy the dips" when quality companies decline, this could be a rare opportunity.

It’s a tough industry and shares of Boston Beer are still not exactly cheap on a valuation basis, trading at 33X forward earnings. You can’t argue with success however, and with a product mix that’s producing steadily growing revenues, Boston Beer is definitely on top of the beverage market, despite the earnings miss.

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