Boston Beer: Love the Product, Not the Stock

It's time to add Boston Beer (NYSE: SAM  ) to the list of companies for which I have a lot of respect for the product but very little interest in the stock. I'll explain why this is so in a bit, but first, let's take a look at the company's results for the quarter.

A summary of the company's financial results, including all of the ratios we Fools like to check out first, can be found in the Fool by Numbers published earlier today. Overall, I'd call the income statement performance great, the balance sheet good, and the cash flow performance disappointing (though this may be only temporary).

Considering the competition from Molson Coors Brewing (NYSE: TAP  ) , Inside Value selection Anheuser-Busch (NYSE: BUD  ) , and others, the company is doing very well with sales. However, in its conference call, the company announced that it will either find a different partner for its brewing contract (which is expiring in October of 2008) with SABMiller or build its own brewery.

From the press release and the way things were discussed on the conference call, it sounds as if the company is close to a deal to construct its own brewery in Massachusetts -- but nothing is decided just yet. The company estimates that a brewery would cost between $120 million and $160 million to construct, which means the company would ultimately need to take on debt. However, the balance sheet is strong, and with the right financing, the company's cash flows are also strong enough to support a fair amount of debt.

The ultimate problem I have with Boston Beer is its valuation. The company is reasonably valued if you believe it can grow its free cash flow at 8%-10% for 10 years, which I must admit is possible. However, I prefer a margin of safety in my investments, and today Boston Beer just doesn't cut it. The case becomes weaker when I adjust the company's free cash flow for tax benefits from stock options and the net effect of its purchases and sales of trading securities (which I reclassify into cash flows from investing activities).

For now, I'll take the beer instead of the stock, please.

At the time of publication Nathan Parmelee had no interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.