Has Boston Beer Company Lost Its Head?

In this Market Foolery segment, the cast opens the mailbag to tackle a listener question regarding Boston Beer (SAM 0.74%). Despite its low debt, management has shown no desire to deploy its balance sheet to acquire rising stars in the craft beer segment to boost growth. Does this defensive posture have a rationale that investors can get behind?

A full transcript follows the video.

This video was recorded on June 7, 2017.

Chris Hill: From Sal in the 908 -- I think that's Jersey. "The last two years have not been kind to Boston Beer shareholders as we have seen the stock drop below $150 a share. I've been waiting/hoping for a big move out of Boston Beer, and I've seen nothing. They've sat on the sidelines as big brewers gobble up small craft brewers. Their strategy of 'wait until the small guys die' won't pan out if there's a chance those guys are sent life preservers with motors so they can expand and distribute through the big guys. The successful ones are being purchased for amazing sums of money. What are your thoughts? I used to trust Management's direction, but I am becoming increasingly concerned for a company with virtually no debt. I would love to see them invest in small craft brewers, whether through buying out or ownership stakes." That's a great question, particularly in the wake of what we were talking about with, how do companies use money? Because we love to look at businesses, but as we say all the time, people are running these businesses, and one of the decisions these people make running the businesses is, how do they allocate capital? And in the case of Boston Beer, we've talked about this before, some have gone out and said, "Hey, Ballast Point, we'll spend a billion dollars on that." So, you can applaud Boston Beer for not taking out a huge checkbook and doing that. But to Sal's point, they have the money.

Jason Moser: They do.

Hill: So I guess my first question is, he's starting to waver on management. Where are you on Boston Beer's management right now, in terms of what you've seen over the last couple of years?

Moser: Sal, as a shareholder of Boston Beer myself, I feel your pain. I would say to you -- this has been a very frustrating investment from the perspective of, it's becoming more and more apparent that founder Jim Koch is more inclined to just batten down the hatches and ride this storm out, versus trying to get it there and actively do something to make something happen. I think we've been hit with this tremendous craft beer revolution, so to speak. And what it's done is taken craft beer to the local level, which has been great if you're a beer fan, because there's all sorts of local flavors out there, and people really enjoy being able to support their own local breweries. And I think there's a future where Boston Beer exists. But it's hard for me to see the case for buying shares today, because I think it's going to take a while for anything to happen. Jim Koch's thrown some clues out there, at least, that he's going to wait this thing out. He talked about an example with Corona at a point in time where over the past eight years, Corona's depletions had been down, and they only got back to their 2006 to 2007 levels recently. So they more or less just kept on investing in the brand and waiting it out, and volumes came back eventually. But that took a lot of time. And obviously, Corona is not just one brand, it's part of Constellation, which owns a lot of brands including Ballast Point. Let's be clear, buying Ballast Point for $1 billion was absolutely unreasonable. Now, if you are a Ballast Point owner, you have to take that deal. You just have to take that deal. Craft roots be damned, that's $1 billion, you can't turn that down. 

So from Koch's perspective, he is very much a craft beer guy. I don't think he wants to become part of something bigger. And there's been a lot of good literature out there recently about craft beer, and how the big brewers, their strategy at this point -- we're talking about Anheuser-Busch InBev and Miller, companies like that -- their strategy is basically to marginalize the craft beer market. Buy these little craft beer labels, take them to market, cut the prices, and more or less just whittle down that perception between your Budweisers and your craft beers of the world. So, I think that has really put Boston Beer in a tough spot. And I don't know that there's an easy solution. What I would love to see them do is invest in some new craft brands, and become what I liken to the Buffett of craft beer. I think there's an interesting opportunity for Koch to do that. But by the same token, he's not going to do that in the face of these really robust valuations today. And they've said as much on the call. So they're not going to go out there and make acquisitions just for acquisitions' sake. He says between the two choices here, of making acquisitions of high-priced companies or just buying back their own stock at depressed levels, they're going to buy back their own stock. I admire that. At least they're doing the right thing in saying, "We feel like our stock represents a compelling value, we're going to buy more of that stock back, try to return more value to shareholders that way, and play the waiting game." As a shareholder, I'm going to keep my shares because I don't need to sell them, and I think there's value there in the brand and the distribution, the facilities that they have. But I think it's going to be a much longer story to play out than perhaps we anticipated even two or three years ago.

Hill: Sal mentioned the price of Boston Beer's stock, just to put it in percentage terms, over the last two years, the S&P 500 up about 16%. During that same time period, Boston Beer shares down 45%. So, 60% trailing the market there.

Moser: Yeah. And they're looking for a new CEO, too. Martin Roper is getting ready to step down. They brought in a new chief marketing officer and they're trying to do some rebranding. I think, if you've noticed, there's new labeling on the bottles. I think they're pursuing some more different types of flavors. They really dropped the ball this spring with their new seasonal offering, so hopefully we'll see a little bit of a better performance this summer with their summer ale, because that's always, traditionally, a strong performer. But there's a lot of challenges out there for these guys right now. It's not going to be an easy solution. But I think in order for them to grow in a meaningful way, they're going to have to add new craft brands to that portfolio at some point or another. It's just anyone's guess as to when that is. But I think we're going to really have to wait to see some of these valuations come back to earth.