Analysts at Macquarie recently downgraded shares of Boston Beer (SAM 1.88%) from hold to underperform, while BMO Capital Markets cut its price target on the brewer's stock but maintained its hold rating, a view that's in line with the rating assigned to it by most other analysts. The average price target is now about 4% lower than where it closed on Aug. 10.
But just because the Wall Street pros aren't seeing an upside for Boston Beer, that doesn't mean you should automatically follow their recommendations. Let's take a look at the leading craft brewer's prospects.
Image source: Boston Beer.
Beer sales lack froth
On the surface, there are good reasons for the analysts' dour outlook. Beer consumption is declining, and while there is still growth in the craft beer niche, it is indisputably slowing down. Boston Beer's flagship Samuel Adams brand hasn't posted a single quarter of higher depletions in more than three years. ("Depletions" is how the beverage industry refers to shipments to distributors and retailers, and the statistic is a used proxy for consumer demand.) Below is a chart of the company's total depletions across all products.
Data source: Boston Beer quarterly SEC filings. Chart by author.
Although the brewer is enjoying considerable success with its hard teas, ciders, and seltzers, beer is the bulwark of Boston Beer's portfolio (duh!) and its sales remain skunked. It has had hit-or-miss success with new flavors, like its lager-ale mashup Sam '76 or the Samuel Adams New England IPA, which is a play on the current hazy beer fad, but even founder and Chairman Jim Koch admits there's no evidence yet they'll have any staying power.
All of which explains why Boston Beer's stock tumbled after the company reported seemingly better second-quarter earnings in late July. Revenue jumped nearly 10% from the year-ago period, though net earnings tumbled by double that rate. However, the company was able to build on its 8% growth in depletions in the first quarter, posting a 12% gain.
It was truly a mixed bag of results, and the company's guidance followed the same pattern. The craft brewer reiterated its full-year outlook for adjusted earnings and bolstered its forecast for depletions, but it also reduced its gross margin targets for 2018. Coupled with the fact that depletions are only rising thanks to its teas, ciders, and seltzers -- not its beer -- the two-day 15% collapse in its stock price seems warranted.
In a category all its own
A good case can be made that Boston Beer's stock hasn't fallen far enough. Anheuser-Busch InBev (NYSE: BUD), the world's largest brewer, can't gain any traction even though it has gobbled up a large number of craft breweries over the past couple of years, because volumes of beer sold continue to decline in the U.S., its biggest market. Its sales to domestic wholesalers fell by more than 5% in Q2, which was enough to offset the gains it made in every other region.
Likewise, the U.S. revenues of Molson Coors (NYSE: TAP) fell for the fourth consecutive quarter.
But we already knew Big Beer was in trouble, and that's part of the problem for Boston Beer. It has grown to such a size that it no longer is really viewed as "craft" by many beer drinkers, though it remains much too small to effectively compete against the megabrewers.
Because the trends in beer today favor small and local, Boston Beer has found itself locked out of the gains that Craft Beer Alliance (NASDAQ: BREW) is enjoying with its Kona brand, which saw depletions grow 3% in the first quarter.
Despite Craft Brew Alliance not falling under the Brewer Association's definition of being a craft brewer because Anheuser-Busch owns about a third of its business, Kona beers are still very much seen as small regional beers that have stayed true to the Hawaiian roots of the Kona Brewing Co., which joined the alliance in 2010. That may change as Anheuser-Busch is now giving the beers much broader distribution, but they also don't carry the stigma of being your father's craft beer as Samuel Adams does.
Key investment takeaway
Although the analyst community has a consensus hold on Boston Beer's stock, its valuation actually seems inflated relative to its prospects. Shares trade at 43 times trailing earnings and 32 times next year's estimates, while its free cash flow is 36 times its stock price, a rich valuation for such a mature brand, even if it is a craft brewer. Investors might conclude that this time, Wall Street isn't wrong when it comes to its pessimistic outlook for Boston Beer stock.
