Boston Beer (NYSE: SAM ) has been on a tear. The stock is up 131% over the past 12 months, and the company reported a surprisingly good quarter three months ago, showing that growth of its Samuel Adams brand is alive and well in today's crowded beer market that's home to larger rivals Anheuser-Busch InBev (NYSE: BUD ) and Heineken N.V. (NASDAQOTH: HEINY )
With Boston Beer reporting third-quarter results on Wednesday, the stakes are high. The company's stellar performance has investors expecting big things. Boston Beer is selling at 47 times earnings, which means growth has to continue.
The company is guiding for $1.82 in earnings per share, an 18% increase over the year-ago period. That's the easy item to look for in the earnings report. But there are a number of things Boston Beer executives will likely discuss in the call afterwards that could give us insight on where the company stands in this very competitive U.S. beer market.
Let's take a look at three of those areas investors should watch.
Bang for the advertising buck?
There is growing competition for shelf space and tap handles, with a new brewer opening in America every day, and brewing behemoths like AB InBev (NYSE: BUD ) rolling out new lines in an effort to extend flagship brands. In this climate, Boston Beer has been more heavily investing in marketing. It boosted advertising and promotional spending for the second quarter of 2013 by 14% over the prior-year period. It's also been putting more boots on the ground -- members of its sales team working with retailers and taverns to get Sam Adams and Angry Orchard ciders their fair share of shelf space and tap handles. Those investments looked smart last quarter; the company knocked it out of the park, delivering $1.45 per share in earnings, a 37% boost from the prior-year period.
But if that was an aberration, and sales pull back, that could spell trouble. In a market this competitive, Boston Beer must make the extra effort to market and sell, even though that's meant spending a bigger percentage of its budget on it than much larger and much smaller beers have to dedicate. Boston beer spent 27% of its revenue on advertising, promotions, and sales in the six months ended in June. Over that same period, AB InBev spent 15% of its revenue on those costs.
If that spending continues paying off for Boston Beer with higher sales, great. But if the investment doesn't translate to more sales, it will impact margins and drag on EPS, at least in the short term.
Are cans catching on?
Boston Beer has rolled out its flagship lager and some seasonals in cans, a big move for a craft brewer that had always bottled. This is true both from an operational perspective, where a new production line had to be established, and from a sales perspective -- will customers accept it? Cans have certainly lost some of the stigma that they had carried with drinkers of craft brews and imports over the years. But a move to cans by a well-established craft brewer like Boston Beer is always a risky one. Boston Beer thinks its a risk worth taking, since cans are often a better fit for things like tailgate parties, backyard barbecues, and travel.
As of last quarter, executives were reporting seemingly good acceptance of the canned lager. In its first quarter, the "Sam can" accounted for about 4% of sales outside taverns and restaurants. That was about where management expected it to come in. The more recent quarter, however, may give us a better idea of how cans are being accepted. The months of July, August, and September are prime for those outdoor opportunities that Boston Beer had hoped to capitalize on with its canned beer.
How's cider selling?
With its Angry Orchard line of ciders, Boston Beer has fast become an industry leader. But cider remains area of great potential growth for Boston Beer. Cider sales made up only about 2% of the sales of brewers in 2012, according to IBISWorld. But sales were growing at a rate of 27.5% per year over the previous five years.
But Boston Beer is far from alone. AB InBev rolled out its Stella Artois Cidre in May, looking to extend what's already one of the most popular beer labels across the globe. Heineken N.V. (NASDAQOTH: HEINY ) is using its distributing muscle to push the very popular U.K.-based Strongbow brand of cider it bought in 2012. Strongbow is the world's most popular cider, and Heineken says it owns some 25% of the world's market. With Heineken's clout, consumers can expect Strongbow to make its way onto more store shelves and into more tap lines across the U.S.
Retailers have limited space for ciders. While new and exciting for brewers and drinkers, they still represent just a small fraction of sales. Boston Beer CEO Martin Roper warned of a "very wide range of outcomes" in cider as the market matures, even though the company has gotten off to a strong start.
"We just don't know how that category is going to continue to grow," Roper said in July.
Executives should have more to say on cider Wednesday.
The Foolish bottom line
While the top and bottom lines will drive more immediate price movements after earnings, there are always a number of underlying storylines being discussed at the conference call. These are three areas that investors should keep an eye on to see if Boston Beer's long-term strategies are working.