My stance on Boston Beer Co. SAM is simple. I'm impressed with the way they've revamped the business. But I don't like the price tag being charged by the market.
After reporting fourth quarter earnings results on Wednesday, Boston Beer's stock is up a bolstering 13% today at the time of writing. There is certainly much to praise in the fourth quarter release. At the same time, I would urge caution on the current pricing. $303 a share might not leave much room for upside unless we see continued high rate growth.
Fourth quarter results beat expectations. Revenues increased 9.2% to $225.2 million year over year. What I like about the sales increase is that it stemmed from increased shipment volumes of 6.3% rather than relying on prices or short term thinking, while depletions increased 11%. The brewer did a good job on operating income; increasing 94% year over year to $28.85 million. This marks a stark contrast to the year as a whole. Boston Beer suffered with its operating margins in 2018 as it ramped up expenditures related to advertising and selling. For the year, operating income was rather flat at $115.88 million vs. $115.67 million in fiscal year 2017. We'll need to see the operating trends of the fourth quarter continue into 2018 in order for the story to remain bullish.
Fourth quarter net income did take a hit in terms of year over year comparisons, but that was more related to taxes than anything else. Boston Beer enjoyed a tax benefit last year of $15.83 million, whereas this year they had to put aside a $7.16 million tax provision. In result, net income was $21.81 million in fourth-quarter 2018 vs. $30.53 million in fourth quarter 2017. When you look at pretax income, you can see that Boston Beer actually had a much better performing business this year with a roughly 97% increase in pretax income.
Diluted earnings per share dipped to $1.86 for the quarter vs. $2.57 a year ago. Full year diluted earnings were $7.82, giving the stock a trailing P/E of 39. That's not cheap. Non-GAAP earnings guidance for 2019 is giving us a picture of $8.00 to $9.00 a share. SAM iterated that actual earnings could vary greatly. Being ultra bullish, $9.00 a share gives the stock a forward P/E of 34x earnings. Historically, SAM has struggled to get too high above that type of valuation through the past. It's understandable considering how expensive that is for a company like this.
A problem still facing SAM is decreasing demand for its flagship Samuel Adams beers. In their earnings release, the company credited growth in things like Truly Hard Seltzer, Twisted Tea and Angry Orchard as the areas that contributed to growth, whilst Samuel Adams products actually decreased. To me it's pretty obvious that this trend stems from the sheer competition that is now in the craft beer market. I've written before about the severe saturation that is affecting craft brewers' abilities to derive market share growth. I pointed out this problem back in July.
Being my favorite beer, this is disheartening news. Nevertheless, most shareholders probably don't really mind where the growth comes from. The problem is the price tag. It's an expensive stock pure and simple. It doesn't have a dividend either. I think this stock is only attractive down in the $260's.