With Budweiser on the Craft-Brew Warpath, Is Boston Beer Still a Good Bet?

Craft-beer kingpin Boston Beer (NYSE: SAM  ) has built a formidable franchise in the beer business thanks to its first-mover advantage in the craft-beer segment. It's an area that continues to grow at a double-digit rate as consumers gravitate toward better beer options. The company has also been wise to broaden its product offerings, with successful forays into the malt and cider categories through its Twisted Tea and Angry Orchard brands, respectively. 

However, the global beer giants appear increasingly anxious to capture more of the craft business for themselves. This is evidenced by Anheuser-Busch InBev's (NYSE: BUD  ) recent deal to acquire Blue Point Brewing, a tiny New York-based microbrewer with a loyal local customer base and a quirky portfolio of brews including Blueberry Ale and Toxic Sludge.  So, with the King of Beers hot on its trail, is Boston Beer a good bet at current prices?

What's the value?
Boston Beer has come a long way since introducing its trademark Boston Lager in 1984, with a current stable of 50 beers and annual production of roughly 3.5 million barrels. The company has enjoyed a multi-year, double-digit growth trajectory due to seemingly limitless demand for craft beer as well as a culture of innovation. Such ingenuity has been highlighted by new product unveilings like its Sam Adams Cold Snap and Rebel IPA offerings. 

Boston Beer's strong growth has also partially been a function of its focus on the end customer, which was the impetus for its Freshest Beer Program. The initiative aims to reduce stale products and keep its customers coming back for more.

In its latest fiscal year, Boston Beer continued to post solid results. Performance included a 27.4% top-line gain that was helped by a strong overall volume performance and slightly higher average prices.  The company's core beer business performed admirably. Its non-core units, however, were standout performers, highlighted by a nearly doubling of sales in its cider unit. The net result for Boston Beer was higher operating cash flow, providing funds to further invest in new product development and unique marketing initiatives, like its annual Longshot American Homebrew Contest.

The awakening giant
Of course, everything didn't come up roses for Boston Beer in the latest period, as higher commodity and packaging costs led to a lower overall gross margin. In addition, the company is increasingly finding a need to ramp up its marketing activities in order to offset the craft market share ambitions of the heavy marketers. Industry behemoth Anheuser-Busch InBev, for instance, primarily participates in the sector through its Shock Top and Goose Island labels.

Unlike Boston Beer, Anheuser-Busch InBev found organic top-line growth hard to come by in FY 2013. It reported a 2% decline in volumes after adjusting for the effects of its acquisitions and divestitures. While the company's global brands, including Budweiser and Stella Artois, performed well, its myriad of secondary brands had trouble generating volume increases. 

Despite the challenging sales environment, though, Anheuser-Busch InBev took advantage of consumers' growing preference for premium products to generate higher average prices for its portfolio. In turn, this led to a bump up in its operating profitability.

Unfortunately for Boston Beer, Anheuser-Busch InBev is using much of its aforementioned incremental profit to bulk up its presence in the faster-growing better-beer arena. This is evidenced by its Blue Point Brewing acquisition as well as its blockbuster acquisition of Mexican beer heavyweight Grupo Modelo in 2013. 

The company also owns a major stake in Craft Brew Alliance (NASDAQ: BREW  ) , an amalgamation of lesser known craft-beer brands that has quietly built itself into one of the top five craft-beer players. While Craft Brew Alliance's top-line growth has failed to follow the same trajectory as Boston Beer's growth, with a 5.8% increase in FY 2013, Anheuser-Busch InBev seems likely to make further investments in Craft Brew Alliance in the future. It's attempting to create a diversified portfolio of growing brands in the craft-beer segment.

The bottom line
Boston Beer shows no signs of slowing down, recently reporting strong double-digit sales growth to start the new year. However, the company's operating margin may continue to exhibit downward pressure as more competitors seek to capture the craft-beer segment's sales upside. 

As such, given Boston Beer's above-market P/E multiple of roughly 47, investors should be careful. Nonetheless, Boston Beer seems to still be in good shape for the long haul.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2014, at 8:37 PM, linda77 wrote:

    California Proposition 65 says that Beer Causes Cancer. The law mandates that all cancer causing products must have a CANCER WARNING label. Since none of the beer products sold in California have a CANCER WARNING label, they are all illegal to sell.

    Citizen Enforcers will be serving Prop. 65 Violation notices to all alcohol vending establishments to stop the spread of cancer-causing chemicals in California.

    Stop discrimination, intimidation and harassment of Medical Marijuana patients or Beer will be criminalized in America.

  • Report this Comment On March 28, 2014, at 10:52 AM, cdoorman wrote:

    Biggest issue I am seeing/hearing is that Depletions are getting to be a problem A week before Spring, I find that at a couple of bars the Sam Summer ale is the seasonal. Bartenders say that they sold out of the "Spring" Cold snap and are pushing Summer Ale before the first day of Spring.

    Bartenders are saying "we don't have any say on the seasonals, we sell what they send us"

    I'm willing to buy the seasonals, but they have to be avialable.

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