Has Boston Beer Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Boston Beer (NYSE: SAM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Boston Beer.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 11.7% Fail
  1-Year Revenue Growth > 12% 11.1% Fail
Margins Gross Margin > 35% 56.1% Pass
  Net Margin > 15% 13.3% Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 1.96 Pass
Opportunities Return on Equity > 15% 37.8% Pass
Valuation Normalized P/E < 20 25.85 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Boston Beer last year, the company has kept its four-point score. But better margins and slightly faster growth bode well for the beer maker, as its roughly 30% rise in stock price over the past year shows.

Boston Beer is a prime example of how the beer industry has changed in recent years. Although total volume of beer sales in the U.S. has dropped by more than 1% in both 2010 and 2011, craft beers have taken the industry by storm, posting double-digit volume growth in each of the past two years. As a result, popular beers like Anheuser-Busch InBev's (NYSE: BUD  ) Budweiser and Molson Coors' (NYSE: TAP  ) Coors line are taking a backseat to beers like Yuengling and Boston Beer's Sam Adams Lager in terms of brand value and quality.

When it comes to craft beer, Boston Beer is the king. It dwarfs Craft Brewers Alliance (Nasdaq: BREW  ) , which had less than a third of the volume Boston Beer produced last year. Yet the Sam Adams-maker has plenty of room to grow, as it has captured only about 1% of the overall beer market.

Of course, big beer companies aren't dumb. Molson Coors and SABMiller are now producing Blue Moon, while spirits specialist Diageo (NYSE: DEO  ) has also moved into the industry with its Kilkenny and Smithwick's brews. Yet with a big head start and a CEO with a true passion for brewcraft, Boston Beer still has a clear advantage.

For Boston Beer to keep improving, it needs to focus on growth as well as keeping its margins up. If it can do that, the company should have clear sailing to rise toward perfection steadily in the coming years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Boston Beer isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Boston Beer to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services have recommended buying shares of Molson Coors Brewing, Diageo, and Boston Beer. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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