Boston Beer: A Nice Comeback but Price Target Feels a Bit Expensive

 | Jul 11, 2018 | 5:10 PM EDT
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There's been so much intense discussion about the economic ramifications of trade wars, and global alliances being shattered in the news lately. Let's step back and talk about beer. 

Boston Beer Co. (SAM) , the father of craft beer in America, has had a dramatic couple of years. From a macroeconomic perspective, the company sort of created its own nightmare. By instilling the enthusiasm and dream into so many others of starting their own craft brewer, Jim Koch created what is easily one of the most competitive and diverse industries in the world. To that end, Boston Beer has suffered from stagnating revenues as the craft beer pie continually gets split up amongst more, and more, and more competitors.

Recently, we've seen a revival in the stock. The company is creating big headwinds for itself as sales finally demonstrated a return in the right direction in Q1'18. Citigroup might have been a little late to the party on July 10 when it raised its price target for Boston Beer to $307. The stock has indeed experienced quite a run over the past few months. Year to date, SAM is up over 60%, making it one of the best buys you could have right now. Of course, we've seen this stock story from Boston Beer before. Back then, the beer environment was much more enticing. Trading around $306, and right in line with most of these price targets, it pays to take a look at the actual earnings/market to decide whether Boston Beer can actually keep this stock momentum.

The beer market itself is actually not all that strong right now 

According to the Brewers Association, U.S. beer sales actually declined by 1.2% in 2017. The only strong spot was craft beer; which increased sales by 5% (based on production volumes). In dollar sales growth, Craft sales increased 8% to $26 billion. At first you might say "well that's a good thing". It is, until you compare it to past growth rates, and the number of new craft brewers that have joined the ranks. The growth is partially stemming from new brewers. But those new brewers also appear to be cutting into the older players sales. This means that total share of the market for companies like Boston Beer Co. are threatened. 

With total U.S. breweries in the United States increasing by 16% between 2016 to 2017, there are nearly 6,400 different operations competing with each other for market share. I would challenge you to find a comparable industry with that much competition. The bulk of the increase stems from microbreweries which increased 19.3% between '16 and '17 alone. These are astronomical growth figures. Considering that the big emphasis on craft includes an enthusiasm for "local" amongst its consumer base, these thousands of microbrews are definitely having an impact on the bigger players abilities to maintain market share. Even the chief economist for the Brewers Association acknowledged that consumers are supporting the smaller and more local brewers. The plethora of options has diminished Boston Beer's appeal. This makes one wonder whether the recent uptick in sales can be sustained.

Financials  

Since 2015, Boston Beer has dealt with lower overall revenue streams from a slowdown in their sales. After topping out in 2015 with 22% revenue growth, Boston beer began to plateau sharply in 2015 with growth of 6.3%. Subsequent years included sales declines of 5.57% and 4.79% respectively. SAM was able to counter those declines with improved performances in net income. The brewer made strong moves to curtail unnecessary spending ,and drove earnings to keep the stock price from falling further. The changes came to fruition in 2017 when Boston Beer reported earnings of $8.13 per diluted share; a 19.7% for the year.  Going off of the trailing full year earnings, that makes Boston Beer's $307 target a bit pricey at a P/E of 37. The company will need to make 2018 a big comeback year in order to maintain it.

The first quarter was a good start. Revenue increased 17.8% to $190.5 million; a welcomed sight by shareholders. The company increased shipments by 15%, and increased net income $3.6 million year over year to $9.3 million. That's $0.78 per diluted share. That's a 136% improvement over Q1'17. Bear in mind, taxes were a factor, but overall the company seems to have righted the ship in terms of driving sales. New products like the Sam'76 and their lineup of hard seltzers are helping to boost appeal. 

Unfortunately, the company's own guidance doesn't justify the current stock price in my eyes. Analyst estimates hole the average full year earnings consensus at $7.75 a share. That's well below last year's earnings of $8.13, meaning at $307 the forward P/E ratio will be pushing 40. Even at the high end of the spectrum, $9.19 per share would have the current stock price at a premium of 33 times forward earnings. As much as I love the company, I have a hard time seeing the stock maintain that kind of momentum. We're right back where SAM was in 2015 in terms of the share price. It just feels like a little too much price appreciation, a little too quickly. 

I myself would take profits and look for shares around $280. That price would allow room for actual meaningful upside, whereas at these levels, you're chasing the rally. Of course, surprise earnings that provide an uptick in guidance could very well alter the equation. Cheers.

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