The Boston Beer Company Inc. (SAM - Free Report) stock continues to witness an unprecedented momentum despite the turmoil in the Beverages-Alcohol industry due to the softness in the beer category, the consumers’ shift to healthy options and higher aluminum costs. The soft craft beer category, which includes Boston Beer’s flagship Samuel Adams beer, is surely hurting its top line. However, the company remains poised to gain from its vast non-beer portfolio, including the Twisted Tea, Truly Spiked & Sparkling, and Angry Orchard brands, which are witnessing an increased demand as a result of the switch-over from beer.
Notably, shares of Boston Beer have surged 16.7% in the last three months against the industry’s decline of 4.7%. Moreover, this Zacks Rank #2 (Buy) stock is hovering close to the 52-week high mark and has an estimated long-term earnings growth potential of 6%.
Factors Supporting the Stock’s Growth
Investors remain optimistic about the progress on Boston Beer’s three-point growth plan that focuses on cost-saving initiatives, long-term innovation, and the revival of Samuel Adams and Angry Orchard brands. Further, the company’s focus on pricing, product innovation, growth of non-beer categories and brand development are likely to boost operational performance, and market position. Apart from introducing new styles and flavors in the craft beer category, its innovation in the non-beer categories, including hard teas, ciders and seltzer, has been a hit among liquor drinkers. This should collectively drive depletions growth in the future.
Though Boston Beer’s top line missed estimates in second-quarter 2018, it improved 10.2% year over year, driven by 9% improvement in shipment volumes and 12% depletions growth. This double-digit growth marked record depletions for the company. In the reported quarter, depletion primarily gained from major innovations, quality and strong brands alongside solid sales execution and support from distributors. Additionally, increases in Twisted Tea, Truly Spiked & Sparkling, and Angry Orchard brands aided depletion growth.
Depletions for the year-to-date period through the 29 weeks ended Jul 21, 2018, are estimated to have grown nearly 12% from the comparable year-ago period.
The company’s non-beer portfolio is poised to deliver significant depletions growth in the future, driven by the expansion of distribution and customer base for the Twisted Tea brand, the early success of the Angry Orchard Rosé cider launch, and the Truly Spiked & Sparkling brand’s leadership position in the emerging hard sparkling water category. Based on favorable trends witnessed in the first half, the company raised its depletions forecast for 2018. It projects depletion to grow 7-12% against the prior guidance of flat-to-up 6%.
Moreover, Boston Beer’s balance sheet is reasonably healthy, indicating that its cash position should be able to fund strategic investments. The company’s cash balance of $76.2 million as of Jun 30, 2018, along with operating cash flows of $150 million, reflects an immense potential to fund future cash requirements. Further, disciplined capital spending and ongoing cost-control programs indicate improving cash flows.
Boston Beer also focuses on enhancing shareholder value as clear from the buyback of 222,000 shares worth roughly $50.5 million in the year-to-date period ended Jun 30, and the period between Jul 1 and Jul 20. With this, it had nearly $128.1 million remaining under its $931-million share buyback authorization as of Apr 20, 2018.
Increased Costs Hurt Quarterly Performance
Boston Beer reported lower-than-expected top- and bottom-line results in second-quarter 2018, mainly due to higher advertising, promotional and selling expenses as well as gross margin contraction. This marked an earnings lag after a beat in the last-reported quarter. Including second-quarter 2018, the company delivered negative sales surprise in three of the trailing four quarters. This was mainly due to higher investments in media advertising, local marketing, salaries and benefits costs, and increased freight to distributors on escalated rates and volumes as well as stock-compensation expenses.
Further, Boston Beer’s gross margin contracted in the second quarter, owing to higher processing costs — stemming from increased production at third-party breweries as well as escalated packaging costs. The company notes that there are two parts to the increased packaging costs, one is the coming to market commodity costs that are prevalent industry-wide and the other is some freight costs on ingredients (packaging material) delivered.
For 2018, the company expects investment in advertising, promotional and selling expenses (excluding any increase in freight costs) to increase $15-$25 million. Moreover, general and administrative expenses are likely to grow $10-$20 million, attributable to organizational investments and stock-compensation expenses. Further, the company lowered its gross margin forecast for 2018 due to higher costs from increased production volumes at third-party breweries, and higher ingredient and packaging material costs. Gross margin is now estimated to be 51-53% compared with the previous guidance of 52-54%.
Despite the cost pressures, we expect the company’s continued focus on its growth plans, along with a healthy balance sheet, to help in boosting operational performance, as well as position, in the market. These efforts and strong non-beer portfolio are likely to aid future earnings growth.
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Archer Daniels has increased nearly 13.9% in the past three months. The company delivered average positive earnings surprise of nearly 18.6% in the trailing four quarters.
Turning Point Brands has rallied 20.3% in the past three months. Additionally, the company delivered positive earnings surprise of 2% in the last-reported quarter.
Medifast has surged 49% in the past three months. Moreover, the company has long-term earnings growth rate of 20%.
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