Last time I touched on Boston Beer (SAM) , I expressed my concerns that the brewer was facing increasingly higher costs to induce its renewed sales growth. If those higher costs became a recurring necessity, it would have detrimental effects on operating income, and be a sign that the business might really have found its ceiling in a market with a plethora of competitors.
I'd be remiss if I didn't say that following Boston Beer is a joy for me. I love their beer. Unfortunately I'm not seeing progress in the areas needing fixed. After a tough few years, the company found its stride in the fourth quarter of 2017; and has been fighting back into a growth story ever since. That battle has not been easy, as we witnessed a regressive performance in the second quarter, but the company is definitely on the right track. Their third quarter results marked a big turn in developing a more established positive trend. It's a bit sad to me that the company's own management acknowledged the growth isn't coming from Samuel Adams beers; but rather from more fizzy, "flavored" drinks. Nevertheless, a good quarter is a good quarter.
Revenues increased 24.2% in the quarter to $306.9 million year over year. The company noted the big jump in revenues as a direct result of a 23.5% increase in shipments for the quarter. Indeed, the company is moving a lot more alcohol. In the first nine months of the year, total barrels sold are up 15.9% to 3,328. That's all great! But when you look at the price of that growth, it all seems more futile. SAM's gross profits increased 19.5% to $157.23 million; but the operating expenses being incurred are making the gains irrelevant. Total operating expenses increased 38% to $110.5 million. Those expenses stem primarily from higher advertising, promotional and selling expenditures. Far outpacing gross profit growth, operating income actually fell 9.25% to $46.73 million. Offset slightly by increases in net interest income, total income before taxes was $47.02 million. That's a 9.4% decline year over year.
So where did the earnings come from? There were two things within the company's third quarter that allowed for higher net income; lower taxes and a decreased share count. The provisions set aside for taxes were cut by more than half to $9.01 million. Thanks to lower taxes, net income increased 12.8% to $38 million. That increase, coupled with a 2.7% decline in shares outstanding, created diluted earnings per share of $3.21. That's a 15.46% increase.
The better earnings didn't actually come from the businesses increased sales. It came from easier taxes. The company's increased sales actually resulted in lower operating income. This is the second quarter in a row that has happened, and it makes me very uneasy. As much as it pains me to say it, Boston Beer is not a buy right now. The single exception would be if there was buyout potential. Right now, I'm not sure that's on the table as the price is too high. The company has $5.96 per in earnings per diluted share thus far in 2018. If some estimates of $1.65 for the fourth quarter prove close, it seems likely that SAM can come close to full year estimates of $7.63. That would give the current share price of $310.10 a P/E of 40x forward earnings. That's a bit much when you consider what's happening to operating income.
CEO David Burwick noted in the third quarter results that the company is "forsaking short term earnings" for long term investments and long term gains. I can appreciate the mindset, but he also reiterated that the results will likely take until 2020 to show a big impact. That's a long time to sit on the stock. I don't see the point in buying shares at over $300 when all we're seeing at the moment is declining operating income and continually stiff competition. Of course, all of this excludes the presently volatile market that makes the situation even more questionable.