The Boston Beer Company Inc. (SAM - Free Report) displays mixed sentiments. Robust quarterly performances driven by consistent momentum in shipment volumes and depletions have been providing a boost to the stock’s performance. We believe that there is momentum left in the stock, courtesy of its vast non-beer portfolio — including the Twisted Tea, Truly Spiked & Sparkling, and Angry Orchard brands. However, softness in the Samuel Adams brand, and higher packaging and transportation costs remain headwinds.
Let’s delve deeper and find out reasons why we should retain this stock now.
Strong Depletions Aid Quarterly Performance
Boston Beer has been witnessing sturdy depletions growth for a while now, which is aiding its top-line performance. In fourth-quarter 2018, revenues improved on the back of a 6.3% improvement in shipment volumes and 11% depletions growth. Depletions growth can be primarily attributed to major innovations, quality and strong brands alongside solid sales execution and support from distributors. Strength in the Twisted Tea, Truly Hard Seltzer and Angry Orchard brands also aided depletion growth, somewhat offset by fall in the Samuel Adams brand. Depletions for the year-to-date period through the six weeks (ended Feb 9, 2019) have improved nearly 12% from the comparable year-ago period.
In fact, the company is poised well to deliver significant depletions growth in future backed by expansion of distribution and customer base for the Truly brand, investment plans in packaging for the Angry Orchard Rose, and the emerging unit of Hard Seltzer brand’s leadership position. Additionally, the Twisted Tea brand continues to deliver double-digit volume growth owing to its increasing distribution and velocity. Based on the favorable trends witnessed in 2018, the company projects depletions and shipments to grow 8-13% in 2019.
Robust Surprise Trend & Outlook
Boston Beer displays solid top- and bottom-line trend, which continued in the fourth quarter of 2018. While the company has surpassed earnings estimates in seven of the trailing nine quarters, it delivered positive sales surprise in five out of the last seven quarters. Driven by impressive quarterly results, the company expects double-digit growth in revenues and robust increase in operating income during 2019. Adjusted earnings per share are now envisioned to be $8-$9, up from $7.47 earned last year.
Three-Point Growth Plan
Boston Beer remains committed to the three-point growth plan, which is 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. As a result, the company continues to anticipate improvement in the gross margin by one percentage point every year through 2019. 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.
What Holds Us Back
Despite robust surprise trends and positive fundamentals, we remain on the sidelines due to persistent softness in the Samuel Adams brand as well as higher packaging and transportation costs.
Notably, the Samuel Adams brand is struggling due to the industry-wide softening of the craft beer growth rates and increased choices for drinkers owing to entry of smaller craft brewers. Despite witnessing success in Sam'76 and Samuel Adams New England IPA products as well as major innovations, volumes for the Samuel Adams brand continued to decline in fourth-quarter 2018, which partly hurt depletions.
Further, the company is witnessing soft gross margins due to higher processing costs on increased production at third-party breweries and higher temporary labor at company-owned breweries as well as escalated packaging costs. Moreover, higher freight costs to distributors on increased rates in volumes as well as less efficient truck utilization is weighing on gross margin.
Additionally, higher advertising, promotional and selling expenses along with increased general and administrative costs remain a threat to the company’s overall profitability. For 2019, investment in advertising, promotional and selling expenses is envisioned to increase $20-$30 million. Notably, this guidance excludes any changes in freight costs for the shipment of products to the company's distributors.
Boston Beer Remains Strong Vs Peers
Looking closely at the stocks in the broader industry, we note that Boston Beer is quite ahead of the peer group. Notably, this Boston, MA-based alcohol company has gained 57.2% in the past year against the industry’s decline of 22.4%. Meanwhile, stocks like Molson Coors Brewing Company (TAP - Free Report) , Constellation Brands (STZ - Free Report) and Anheuser-Busch InBev SA/NV (BUD - Free Report) have witnessed declines of 18.4%, 23.2% and 22.1%, respectively, in a year.
This Zacks Rank #3 (Hold) company’s long-term impressive earnings growth rate of 10% and a Growth Score of A are added positives. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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