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Boston Beer's (SAM) Rally Continues, Will Growth Sustain?

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The Boston Beer Company Inc. (SAM - Free Report) displays a remarkable upside story despite the looming effects of the coronavirus pandemic. Strong shipments and depletions growth have been the cornerstones of its success, even amid the pandemic. Notably, strength in Truly Hard Seltzer and Twisted Tea brands has been aiding the company’s top line.

It also provided an upbeat view for 2021, driven by expectations of growth across all its brands. It foresees significant growth opportunities for its Truly, Twisted Tea and Dogfish Head brands, which are key priorities in 2021. It predicts the operating expense growth rate to be below the top-line growth rate, resulting in operating income leverage in 2021.

The company envisions earnings per share of $20-$24 for 2021, excluding the impacts of ASU 2016-09. Depletions and shipments are likely to increase 35-45%. It expects a national price increase of 1-2% for 2021. Advertising, promotional and selling expenses are forecast to be $120-$140 million, marking a decline from $130-$150 million mentioned earlier. The advertising, promotional and selling guidance does not assume any changes in freight costs for the shipment of products to its distributors.

Backed by the aforementioned positives, shares of this Zacks Rank #3 (Hold) company have gained 21.8% year to date against the industry’s decline of 3%. It has also comfortably outpaced the Consumer Staples sector and S&P 500’s growth of 1.3% and 7.4%, respectively, over the same period.

 


 

The Zacks Consensus Estimate for 2021 revenues presently stands at $2.37 billion, suggesting growth of 36.4% from the year-ago reported figure. The consensus estimate for 2021 earnings of $22.43 per share suggests an increase of 52.8% from the year-ago quarter. Moreover, the estimate has been unchanged in the past 30 days.

Factors Influencing Growth

Boston Beer is the largest premium craft brewer in the United States and commands a strong portfolio of globally recognized brands. Apart from selling alcoholic beverages in the United States, the company distributes its beverages in Canada, Europe, Israel, the Caribbean, the Pacific Rim, Mexico, and Central and South America through a strong network of wholesale distributors.

We expect the company’s continued focus on pricing, product innovation, growth of non-beer categories and brand development to boost its operational performance and position in the market. Its innovation in the non-beer categories, including hard teas, ciders and seltzer has been a hit among liquor drinkers, which should continue to drive growth. Its diversified brand portfolio has fueled double-digit depletion growth for the 11th straight quarter in fourth-quarter 2020.

The company has lately been witnessing robust trends for the Truly and Twisted Tea brands, which has been driving depletions. In the fourth quarter of 2020, the company witnessed accelerated depletions growth for the Truly and Twisted Tea brands. The Truly brand’s growth was led by Truly Lemonade Hard Seltzer, which continues to be very strong and well ahead of hard seltzer category growth. Notably, the Truly brand recorded triple-digit volume growth in 2020 and has been growing its velocity and market share sequentially since early 2020 despite several hard seltzer brands entering the market.

Truly is the only hard seltzer brand that was not launched in 2020 but expanded market share growth in the measured off-premise channel from 22 points to 26 in 2020. Moreover, the company expects the Truly brand to continue leading to business growth in 2021.

In early 2021, it launched the Truly Iced Tea Hard Seltzer, with a blend of refreshing hard seltzer and real brewed tea and fruit flavor, which was well-received by distributors and customers. Also, the Twisted Tea brand benefited from higher at-home consumption despite increasing competition from new players. Further, it continues to generate double-digit volume growth.

Also, Boston Beer remains committed to the three-point growth plan focused on the revival of its Samuel Adams and Angry Orchard brands, cost-saving initiatives, and long-term innovation. Firstly, it plans to revive the Samuel Adams brand through packaging, innovation, promotion and brand communication initiatives. Further, it remains keen on retaining Angry Orchard and Twisted Tea’s momentum, while ensuring Truly Spiked & Sparkling's leadership position in the hard sparkling-water category.

Secondly, the company is focused on accelerated cost savings and efficiency projects with savings directed for further brand development. Its third priority is long-term innovation and maximizing the shareholder value. Boston Beer remains optimistic about the future of craft beer and cider categories.

Possible Headwinds

The company has been witnessing a decline in gross margin for the past few quarters. Notably, COVID-related safety measures have led to a reduction in brewery productivity, leading to a shift of more volumes to third-party breweries. This has been resulting in higher production costs, which has been negatively impacting the gross margin.

Going forward, the company expects to incur incremental costs due to increased usage of third-party breweries and an increasing percentage of variety packs in the company's overall product mix. Consequently, it anticipates gross margin for 2021 to be negatively impacted until volume growth stabilizes. For 2021, it now anticipates a gross margin of 45-47%, reflecting a decline from 46-48% mentioned earlier.

Also, higher advertising, promotional and selling expenses remain a threat to the company’s overall profitability. In fourth-quarter 2020, advertising, promotional and selling expenses rose 51.6%, driven by higher investments in media and production; elevated salaries and benefits costs; and increased freight to distributors, owing to higher volumes. Moreover, an increase in salaries and benefits costs partly impacted general and administrative expenses.

Other Stocks to Watch

The Estee Lauder Companies Inc. (EL - Free Report) has an expected long-term earnings growth rate of 10.7%. It presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Constellation Brands Inc (STZ - Free Report) has an expected long-term earnings growth rate of 7.4%. The company has a Zacks Rank #2 (Buy) at present.

Compania Cervecerias Unidas, S.A. (CCU - Free Report) , also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 10.2%.

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