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While it's often not pleasant when it happens, companies that forsake earnings in the short-to-medium term to increase their long-term growth potential are rare and investors should celebrate them. However, this is usually not the case in the current personal finance landscape, where instant gratification rules the day.
Craft beer brewer Boston Beer (NYSE: SAM ) , which struggled to keep up with high demand last year due to various operational difficulties, is investing heavily in its supply chain and distribution platforms. While the company expects that this will decrease its earnings in the short-term, it is positioning itself to be better prepared for future growth.
Accordingly, on any weakness caused by short-term earnings declines, shares of Boston Beer are a buy. The company is growing faster than peers like Molson Coors Brewing (NYSE: TAP ) and it remains the best way for investors to capitalize on the surge in the craft beer market.
Preparing for the future
On the company's most recent earnings call, President and Chief Executive Officer Martin Roper started off by explaining the challenges the company faced last year as he said, "Over the past year, our supply chain struggled under the unexpected increased demand and we experienced higher operational and freight costs as we reacted. While our growth continues to challenge us operationally, we improved our service levels to our distributors during the fourth quarter and decreased our product shortages."
CEO Roper then went on to explain the ways in which the company was preparing to handle these problems, which include significantly increasing both its packaging and shipping capabilities as well as its tank capacity. He bluntly stated, "Given the opportunities that we see, we expect a continued high level of brand investment and capital investment as we pursue growth and innovation. We are prepared to forsake the earnings that may be lost as a result of these investments in the short term as we pursue long-term profitable growth."
The company is also attempting to reduce costs without risking sales growth. Management has implemented a program in which it is helping participating distributors to lower their inventory levels and increase their depletions, or the total number of cases sold to retailers. Currently, participation in the program represents about 65% of Boston Beer's total volume but management hopes that the number could reach 70%-80% by the end of the year.
Boston Beer also continues to invest in new beer brands. By announcing a constant flow of new seasonal beers to quench the taste of America's evolving craft beer drinker, the company is positioning itself to remain atop the niche beer market. The company continues to invest in its R&D division Alchemy & Science as well and expects to devote another $5-$7 million to the program in fiscal 2014.
The following is a breakdown of Boston Beer's projected growth in 2014 in comparison with that of larger industry competitor Molson Coors:
|Company||Revenue Growth 2014||EPS Growth 2014|
The reason Boston Beer is growing so aggressively at the moment is because of its direct exposure to craft beer. Sales of craft beer have been rising while traditional beer sales remain flat. In 2013, the niche market grew sales approximately 20% while total beer sales essentially remained flat.
Companies like Molson Coors, which has some exposure to the craft beer market through specialty beer brands like Blue Moon and Creemore Springs, are struggling to grow due to their heavy reliance on traditional beer brands like Coors, Miller and Molson. Although the larger company has a much more diverse product mix and subsequently carries a lot less risk, investors who seek high growth have no better alternative than Boston Beer.
Time to take a sip
While investors need to be wary that earnings for Boston Beer in the short-term will likely be weak, they can also be confident that the company's sales growth will remain strong. After all, Boston Beer's biggest problem last year was that it simply could not keep up with demand, which is a high-quality problem to have.
With management's stated commitments to finding and creating new beer brands to keep up with the ever-evolving craft beer market and improving the company's operational performance, investors can take a sip of Boston Beer now and savor it for the long-term.
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