Many people enjoy a glass of beer now and then. But I don't think that anyone, except maybe an aspiring carny trying to impress David Hasselhoff and Jerry Springer on America's Got Talent, would enjoy glass in their beer.
Boston Beer's (NYSE: SAM) quality control found that a portion of its bottles contained grains, even slivers, of glass. The company instituted a massive recall that swung it to a slight loss in the quarter.
The company's underlying results showed great top-line growth but weak earnings. Comparable first-quarter revenue (excluding the recall impact) increased 18% compared to the year-ago period, with volume up a healthy 12%. It seems that consumers are still trading up to the affordable luxury of craft beers despite formidable headwinds of aggressive price increases and despite becoming increasingly cash-strapped.
The company's gross margin, excluding recall effects, contracted by a little less than 1%, a decent result in the face of skyrocketing commodity costs. It was the company's operating margin that reflected weakness; it dropped into negative territory, even after excluding the effects of the recall. Although seasonally a weak quarter, this was compared to a 12% operating margin the year before. Increased freight, salary, and advertising costs were the culprits.
This brings the major American brewer earnings season to a close. I think Boston Beer is in the middle of the pack, as Molson Coors (NYSE: TAP) reported very strong Q1 results, but industry behemoth Anheuser-Busch (NYSE: BUD) reported Q1 results that showed weak performance from both its core brands and alarming margin compression from Grupo Modelo.
Boston Beer has made some shrewd moves recently. It released excess hops to fellow craft brewers in the face of a hop shortage, and decided to renovate a Lehigh Valley, Pennsylvania, brewery instead of building a new brewery in western Massachusetts, the estimated cost of which seemed to double every time management mentioned it.
However, this does not make Boston Beer a screaming buy. The company has decent growth prospects for at least the next year or two, but this optimism seems priced into the stock. Also, the chances of the company selling out are very slim. Boston Beer has moved more toward self-producing beer over the past few years rather than relying on third parties such as SABMiller (OTC: SBMRY) or High Falls Brewing.
This leads me to believe that the company is not positioning itself for an eventual sale, as a major brewer would likely only be interested in Boston Beer's brands and would look to consolidate or eliminate its breweries.
Taking all of this into consideration, investors looking for a safe haven in alcohol purveyors would be better served throwing back a few shares of Molson Coors or Diageo (NYSE: DEO).
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