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4 Reasons Why Boston Beer (SAM) Must Be in Your Portfolio

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Boston Beer SAM stock seems to be responding to soft results in the last reported quarter as well as turmoil in the Beverages-Alcohol industry due to softness in the beer category, consumers’ shift to healthy options and higher aluminum costs. Consequently, the stock has declined 16.3% in the past month.

However, the stock has shown strong resilience in the past year. This Zacks Rank #3 (Hold) stock has surged solid 50.5% in a year, outperforming the industry’s 19% decline. This can be attributed to progress on its three-point growth plan that focuses on cost-saving initiatives, long-term innovation, and efforts to revive the Samuel Adams and Angry Orchard brands.

 



Looking closely at its performance, the soft craft beer category —including Boston Beer’s flagship, Samuel Adams beer — is hurting the company’s top line. However, Boston Beer 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 due to the switch from beer.

Let’s take a look at factors that are likely to bring Boston Beer back to the growth trajectory.

Strong Brand Portfolio

Boston Beer is the largest premium craft brewer in the United States, which has a strong portfolio of globally recognized brands. Apart from selling alcoholic beverages in the United States, the company distributes beverages in Canada, Europe, Israel, the Caribbean, the Pacific Rim, Mexico, and Central and South America through a strong network of wholesale distributors. Additionally, Boston Beer’s innovation in non-beer categories — including hard teas, ciders and seltzer — has been a hit among liquor drinkers, which should drive depletion growth.

We expect the company’s continued focus on pricing, product innovation and growth of non-beer categories alongside brand development to boost its operational performance and position in the market. Its wide portfolio of brands other than beer and its vast presence outside the United States are likely to aid in overcoming industry-wide weakness in beer sales.

Depletions Growth

Though Boston Beer’s top line missed estimates in second-quarter 2018, it grew 10.2% year over year, driven by 9% improvement in shipment volume and 12% depletion growth. This double-digit growth marked record depletions for the company. Depletions for the year-to-date period through 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. This is likely to be driven by expansion of distribution and customer base for the Twisted Tea brand, success of 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% from flat-to-up 6% stated earlier.

Initiatives Show Potential

Management remains committed to the three-point growth plan. 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. Based on opportunities in 2018 and 2019, the company continues to anticipate improving gross margin by one percentage point every year through 2019. Its third priority is long-term innovation and maximizing shareholder value.

Focus on Enhancing Shareholder Value

Boston Beer’s balance sheet is healthy, indicating that its cash position should be able to fund investments. Its cash balance of $76.2 million as of Jun 30, 2018, along with operating cash flows of $150 million, reflects 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.

Bottom Line

We believe that Boston Beer is well-positioned to witness persistent growth and is likely to return to positive earnings trend in quarters to come. Further, the company’s long-term impressive earnings growth rate of 9.5% and a Growth Score of A support our view.

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