Should Boston Beer Investors Prepare for a Flat Quarter?

Boston Beer (NYSE: SAM  ) is the biggest craft brewer in the U.S.,yet it's growing considerably faster than the craft brewing industry as a whole. Its 27% revenue growth from 2013 outpaced the estimated 20% industry-wide growth rate seen in craft beer overall, according to the Brewers Association. These results also mean that Boston Beer left rival Craft Brew Alliance (NASDAQ: BREW  ) , which posted just 8% growth in 2013, in the dust.

That's a storyline that should have any Boston Beer investor licking his or her chops. But in the wake of a quarter in which Boston Beer reported revenue growth of 34% over the corresponding period of 2013, the company's shares fell by some 5% and remain nearly 12% off their high. Investors, it turns out, were less impressed with Boston Beer's revenue growth than they were by its disappointing earnings numbers.

With Boston Beer set to report on Wednesday afternoon, should investors prepare themselves for another mixed quarter that leaves the Street less than impressed?

Putting money back in the brew kettle
One big reason why Boston Beer missed the mark on earnings -- $1.33 quarterly EPS versus the consensus estimate of $1.49 -- is because it is investing money back into its brewing business. Founder Jim Koch and company have seen demand for their beers outstripping supply -- a dilemma any brewer would gladly accept.

Its new West Coast-style Rebel IPA was selling well, as were some of its seasonals, Koch said in February. Its Twisted Tea beverages and Angry Orchard ciders continue to gain ground, all while sales of its flagship Boston Lager has again started to grow, just in time for its 30th birthday.

This left Boston Beer in the difficult -- but enviable -- position of trying to keep up with the demand for its beers and other libations. What resulted were increased operating and freight costs -- and lower profits.

Here's how CEO Martin Roper addressed the situation in February:

"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." -Fourth Quarter 2013 Earnings Call

Boston Beer "significantly increased" tank capacity at its breweries, expanded its packaging and shipping capabilities in order to keep up with the growing demand, and upped its advertising efforts.

Craft Brew Alliance trails behind
That is is a problem that smaller rival Craft Brew Alliance would gladly trade spots for. Craft Brew fell short of expectations in 2013, even while two of its major brands, Kona and Redhook, posted solid growth throughout the year. The biggest drag for Craft Brew was its Widmer Brothers, the label that has stayed truest to its 30-year-old craft-brewing roots.

Craft Brew has announced that it will look to re-position its three major labels in 2014, treating each as it is serving a different market. Redhook aims to grab the drinker used to Budweiser, Miller, and Coors, but looking to step up. Kona targets a more adventurous drinker who dabbles in imports. And Widmer shoots to go after the more seasoned craft beer veteran.

Boston Beer has been able to target all of those segments under just one brand. That may prove important in the years to come.

Changes in the industry
Despite the continuing growth of the craft industry as a whole, executives from both Boston Beer and Anheuser-Busch InBev (NYSE: BUD  ) have said they see a time of consolidation setting in. Store shelves are overcrowded and bar managers are done adding tap handles. Instead, they see a movement toward stores and taverns streamlining their offerings, devoting more space to the strongest brands.

This is where both Boston Beer and A-B are looking to capitalize. After a stellar year for the Goose Island brewery that A-B acquired in 2011, the world's largest brewer has undertaken a big marketing push for the Chicago-based craft beer maker. With A-B's ability to ramp up production and distribution, Goose Island's growth could certainly accelerate through this year and beyond.

Goose Island remains a threat to Boston Beer, as does Craft Brew and every other successful smaller brewer out there, from Sierra Nevada and Lagunitas to your local brewpub. But with Boston Beer's growth accelerating -- and already outpacing craft beer in general -- it's hard to second-guess what the company is doing.

Foolish Takeaway
The investments in brewing capacity, distribution, and advertising will certainly weigh on Boston Beer's bottom line. Investors should be prepared for another soft earnings number on Wednesday. But investors buying for the long haul should stay more focused on Boston Beer's progress in grabbing an even bigger share of the craft market. If it can continue down that path, those investments will pay off for years to come.

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Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

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 April 30, 2014, at 2:19 PM, Mathman6577 wrote:

    Godo article. I intend to hold for the long term. Good company, good products, and good stock.

  • Report this Comment On April 30, 2014, at 3:50 PM, ScoopHoop wrote:

    Good piece here John-Erik. First quarter 2013 earnings per share for Boston Beer Co. (SAM) was 51 cents, down 4 cents from first quarter 2012. Charles Schwab says the consensus for first quarter 2014 is 69 cents, an increase of 35%. Wow, that's a lot, considering the company tends to spend big bucks in first quarter on building capacity, launching new products and advertising. I expect the company to meet expectations on top-line revenue growth, due to massive demand for Sam Adams beers and Angry Orchard cider. The cider movement is growing so rapidly that Anheuser-Busch InBev plans to launch its own Johnny Appleseed cider. As a stockholder in SAM, I am less worried about SAM meeting earnings estimates, although the stock could fall $20 per share if this happens. I'm more interested in seeing the company meet revenue estimates. I am long this stock and may buy more if the stock falls into the low 220s.

  • Report this Comment On April 30, 2014, at 4:23 PM, ScoopHoop wrote:

    I see after hours trading was halted on SAM. Here's the first quarter earnings and sales:

    BOSTON, April 30, 2014 /PRNewswire/ -- The Boston Beer Company, Inc. (NYSE: SAM) reported first quarter 2014 net revenue of $183.8 million, an increase of $47.9 million, or 35%, over the same period last year, mainly due to core shipment growth of 32%. Net income for the first quarter was $8.3 million, or $0.62 per diluted share, an increase of $1.4 million, or $0.11 per diluted share, from the first quarter of 2013. This increase was primarily due to shipment increases, partially offset by increased investments in advertising, promotional and selling expenses and the impact of a favorable federal income tax settlement of $0.06 per diluted share in the first quarter of 2013.

  • Report this Comment On May 01, 2014, at 9:49 AM, snommis69 wrote:

    Good read. Also, @ScoopHoop, good comments. I'm long on SAM myself, and have been for awhile. It's frustrating when a company like SAM knocks it outta the park but STILL can't meet the magic analyst's expectations, so the stock dips. Oh well, in the long run it won't matter.

  • Report this Comment On May 01, 2014, at 9:58 AM, ScoopHoop wrote:

    I agree. You called this right. You could almost predict a drop in stock price today, the day after earnings failed to meet expectations. Stock is down 14 points today. I picked up 5 more shares at 232.50 and have bid in for five more at 229.50. Last year at this time, the stock fell 20 points but quickly recovered and went onto to reach new highs. I would never sell a company growing organic revenues at 35%.

  • Report this Comment On May 01, 2014, at 9:37 PM, snommis69 wrote:

    Exactly! Unfortunately I'm not in a position where I can buy more right now.

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John-Erik Koslosky

John-Erik Koslosky is a writer, journalism instructor, investor, and all-around Fool. He follows the media and social media industries, and writes about some of their publicly traded companies.

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