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Boston Beer (SAM) Stock Continues to Decline: Here's Why

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A successful portfolio manager is well aware of the fact that dropping underperforming stocks at the right time is as important as picking lucrative stocks. A fall in the company’s stock price as well as downward estimate revisions can be indicators of the ideal time to abandon a share.

It seems that The Boston Beer Company (SAM - Free Report) is one such stock, which is in the red territory at the moment. Shares of this Zacks Rank #4 (Sell) company have dropped 19.2% year to date, highlighting its bearish track.

We believe the primary reason behind the decline in the company’s stock price is the troubles plaguing its Samuel Adams brand, which has been up against severe competition in the craft beer market, and a weakness in the cider class. Boston Beer also remains susceptible to weak depletion trends, which along with other factors hurt its results in the previous quarter.

Though Boston Beer’s earnings beat estimates in second-quarter 2016, both top and bottom lines declined year over year. This was attributable to lower shipments and depletion trends, along with higher costs and intense competition from other craft brewers. The persistence of lower depletion trends at its Samuel Adams, Angry Orchard and Traveler brands owing to intense competition in the craft beer category and weakness in the cider class, chiefly affected results.

Though the company has seen some improvement in depletion trends since mid-June, it is unsure if these trends will continue. Further, Boston Beer has been witnessing contraction in the gross margin for two straight quarters now. In the reported quarter, the company’s gross margin shriveled owing to unfavorable product mix coupled with higher brewery processing expenses per barrel, partially compensated by improved prices.

Taking into account the first-half trends, the company lowered its earnings and depletions outlook for 2016. Further, the company now expects gross margin for 2016 to range from 50–52%, down from 51–53% projected earlier. The soft margin, combined with the bleak outlook, poses threats to the company’s future performance.

Consequently, the Zacks Consensus Estimate witnessed a downtrend. Over the past 7 days, the Zacks Consensus Estimate of $2.58 and $6.39 for third-quarter 2016 and 2017 fell 7 cents and 6 cents, respectively.

Also, Boston Beer remains susceptible to the potential implementation of an excise tax on spirits and intense competition from well-established players in the industry.

However, we believe Boston Beer’s practice of acquiring assets to expand geographically will aid it to gain significant market share. Moreover, the company’s brand-building efforts and initiatives to add new products to its portfolio remain key revenue drivers. Management’s plan of aligning cost structure with volumes should also enhance performance.

While on the one hand, the troubles at Boston Beer seem far from easing in the near term, its brand revival efforts may prove a game changer for the stock. Let’s wait and see who wins this tug of war – Boston Beer’s growth strategies or the hurdles?

Zacks Rank

Some better-ranked stocks in the same industry include Anheuser-Busch InBev SA/NV (BUD - Free Report) , Constellation Brands Inc. (STZ - Free Report) and Molson Coors Brewing Company (TAP - Free Report) .

Anheuser-Busch, with a long-term earnings growth rate of 12.5%, has surged nearly 10.4% in the past one year. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Constellation Brands, a Zacks Rank #2 (Buy) stock, has jumped 18.6% year to date. The stock has a long-term earnings growth rate of 17.8%.

Molson Coors, also carrying a Zacks Rank #2, has gained nearly 17.8% year to date. Moreover, it has a long-term earnings growth rate of 6%.

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