Shares of The Boston Beer Co. (SAM) were surging after reporting some pretty nice first quarter results. The king of American craft beer, SAM has really struggled to create meaningful growth in the past few years as the craft market progressively becomes more and more saturated. More recently, renewed marketing efforts, combined with a few changes within management, seem to be leading to a bit of a revival.
Revenues increased 32.1% year over year to $251.7 million. The company credited the $61.2 million increase to a 32.5% jump in shipments. Gross margins were off by about 1%, as costs did increase in relation to increased production and higher labor costs. What I really like about the quarter is the strong improvements in operating income. Operating income increased 218% to $29.4 million. I had held some concerns that increasing advertising, promotional, and selling expenses would limit the potential here. While the fourth quarter was strong, the company finished 2018 with a decrease in annual earnings, and stagnant operating margins. One quarter didn't seem like enough to go on. The first quarter of 2019 dissuaded much of those concerns, and a trend is forming.
You know the company had a good quarter when they produced great gains in net income despite an increase in tax provisions from a benefit $152,000, to a provision of $6.13 million. Net income of $23.69 million represents a 154% increase year over year. That income breaks down to $2.02 per diluted share vs. $0.78 per share the previous year.
For 2019, Boston Beer is forecasting price increases of 1%-3%. This does concern me a bit, as I'd like SAM's revenue growth to stem from unit sales, rather than price per unit. The company expects depletions and shipments to increase 10%-15%, and they expect full year gross margins of 50%-52%. In keeping with the return to aggressive marketing, they are forecasting advertising, promotional, and selling expenses to increase by $20-$30 million. As long as this marketing investment continues to yield desirable results, I think it's a good play. They have the leverage to out promote smaller names and that's what they need to do.
Though Boston Beer noted that forecasts could change significantly, they're projecting full year 2019 Non-GAAP earnings of $8.00-$9.00 per share. Going off of these Non-GAAP earnings, the stock is trading at roughly 37.5x full year Non-GAAP earnings forecasts. It's tough to compare since we don't know what will happen in terms of diluted earnings, but if you reference historical P/E ratios for SAM, 37.5x isn't very low.
The makeups of their sales are a bit dissatisfying as well. Chairman Jim Koch noted that there is a continuing poor trend for their flagship Sam Adams beer lineup, while CEO Dave Burwick noted that the strong 11% increase in depletions was the result of hard ciders and the Twisted Tea brand, while the company experienced decreases in Sam Adams and Angry Orchard.
Now back to my question from the beginning. Is Boston Beer Co. coming back to life? Well, in a financial sense, yes it is. Ironically the growth isn't coming from "Boston Beer's". It makes sense in a way. The massive increase in the number of craft brewers these days makes it very difficult for SAM to really push the Samuel Adams vehicle. In a way, their problem is of their own making. The company made craft beer cool in America, and inspired many others to start their own enterprise.
With so many players it's more difficult for Boston Beer to gain market share for its Samuel Adams brand. I for one love a good Boston Lager. It is by far my favorite beer. But the plethora of options is giving consumers a lot of choices. That doesn't work well for Boston Beer Co. The future may very well lie in slightly specialized products like twisted tea. Either way, it's good to see the company getting a few quarters of life again. The valuation makes it difficult to call it a "buy" for me, but I do view it as a good "hold" based off of current trends.
