SAM - Boston Beer: Nothing To Toast On (Rating Upgrade)

2023-06-26 18:56:43 ET

Summary

• The Boston Beer Company, Inc. is still suffering from a normalization of demand post the pandemic.
• I am disappointed by the fact that 2023 is another year of "stuck" operations.
• Recognizing the long-term growth potential and occasional momentum run, I am a holder of Boston Beer stock here.

In July of last year, I offered some thoughts on The Boston Beer Company, Inc. ( SAM ) after it saw a massive hangover. The company has seen a huge boom during the pandemic, but managing this actual growth has been tough, after strong demand first introduced massive supply chain issues, followed by stiff competition and volume declines when demand faded.

Even as I called the situation not fully under control, I thought that the prevailing levels looked interesting enough to hold a modest position, as I liked the long-term performance of the business.

Some Perspective

Boston Beer was a key investment darling in the early 2010s, as the business posted double-digit sales and volume growth numbers. This resulted in shares rising from $40 in 2010 to $300 in 2015, and by 2016/2017 the business had seen earnings stagnate around $7 per share, as shares fell back to the $150 mark in response to the growth standstill, or massive growth slowdown.

Pre-pandemic, Boston Beer was a $300 stock, as earnings had risen to about $8-$9 per share, translating into a high earnings multiple, but keep in mind that margins lag that of competition, revealing some upside. With the company acquired Dogfish Head Brewery in a $300 million deal, I was attracted to the addition of these IPA brands to the portfolio.

The pandemic created an unreal situation, with shares having risen to $1,400 per share in spring of 2021, and by last summer shares were back down to $350 per share again. This came after a huge boom-bust cycle with 2020 revenues up 39% to $1.74 billion, as operating earnings rose 68% to $246 million, with net earnings up to $192 million, resulting in earnings of $15 per share.

The company guided for another 40% growth in 2021, with earnings seen between $20 and $24 per share, pushing up shares above $1,000, arguably on the back of stronger earnings but most certainly valuation multiple inflation as well.

In the end, 2021 revenues only rose by 18% to $2.06 billion, as selling, promotion and advertising expenses were up 35%, making that operating earnings were evaporated to $8 million (although this came after a $50 million contract termination and asset impairment charge as well). Moreover, the company posted a big loss in the fourth quarter, providing little inspiration for 2022.

The company originally guided for 4-10% sales growth and earnings between $11 and $16 per share, although the company cut this outlook to earnings between $6 and $11 per share following the release of the second quarter results. Trading at $350, a $4 billion valuation resulted in a non-demanding multiple of 2 times sales, and while earning of $8 per share translated into a higher valuation, there was still the potential for margins to increase (and occasional M&A interest in the business).

Believing that under normal conditions the business should be able to post margins between 10 and 15% of sales, that would work down to a $12-$18 per share number, all while the company held $10 per share in net cash, making it time to rejoin the investment again, although I lacked conviction to hold a full position.

Stuck Here

Fast-forwarding a year from last summer, we have seen shares trade in a $300-$400 range, which included multiple trips to both the lower end and higher end of the range, although we are now near the lower end of the range again at $312 per share.

In February, the company posted its 2022 results with sales up a mere 2% to $2.09 billion as the company posted a GAAP operating profit of $91 million, and that is after a $27 million impairment charge. Adjusted for this charge, earnings came in at $7.07 per share, on the lower end of the revised guidance. Moreover, the company held over $180 million in net cash, despite some minimal share repurchases.

The 2023 guidance was not too comforting with depletion and volumes seen down 2-8%, only in part offset by a 1-3% increase in pricing. This should result in earnings between $6 and $10 per share, setting the company up for another tough year. Capital spending is seen at $100-$140 million, but by now annual deprecation charges have risen to $81 million already, making that net capital investments have been flattening off.

In April, Boston Beer posted a tough first quarter earnings report with sales down 5% to $410 million as a net loss of $9.0 million appeared on the bottom line. Net cash was down to $122 million, due to losses, elevated share buybacks and net capital spending as the company maintained the full year guidance. As this guidance was not too exciting from the get go, it seems that there might be some risks to the guidance.

And Now?

Amidst all these moving trends, I am a little bit disappointed by the performance of The Boston Beer Company, Inc. in this field. Right now, the top line situation is somewhat stable, but the big issue is that in an inflationary environment, the company is not really enjoying pricing power, pressuring margins in a substantial way.

While the situation is stable enough to no longer fear disruption to the business (after earnings and sales imploded to an important extent post-Covid-19), I am disappointed to see another disappointing year in 2023. After all, this came after a tough 2022 already from an earnings point of view. In fact, there might even be downside risks to the current Boston Beer performance this year.

This makes me a holder of a small Boston Beer position here, but I do not see a compelling reason yet to alter this position, although I am happy to keep on a modest position, recognizing the historical volatility and upbeat take on the market at various time on this stock.

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