There are no two ways about it -- Boston Beer (SAM +1.11%) messed up. The ramp-up in production of its Truly brand of hard seltzer over the past year was just too aggressive compared to consumers' actual interest in the products. The brewer acknowledged around the middle of the year that demand isn't as firm as it was expected to be in late 2020. Then in October, CFO Frank Smalla confessed that the company had disposed of an excess supply of hard seltzer it knew it wouldn't be able to sell soon enough. The decision led to a loss of $4.76 per share for the three-month stretch ending in September, versus a profit of $6.61 per share for the same quarter a year earlier.
Shareholders paid the price, of course. The stock's now down more than 60% from its April peak, peeling back in response to the surprising slowdown on the seltzer front.
Image source: Getty Images.
All of these stock sellers, however, may have overshot their target, setting the stage for a rebound sooner than later.
The hard seltzer frenzy fizzles
Hard seltzer was all the rage back in 2020. Market research service NielsenIQ estimates the world spent $4.1 billion on hard seltzer that year, up a whopping 160% from 2019's purchases of the casual, low-calorie alcoholic beverage. That was supposed to be just the beginning, too. Outlooks suggested the hard seltzer market was on track to be worth anywhere from $10 billion to $50 billion in just a few years.
Now, however, it seems those outlooks were a bit too optimistic. Smalla explained during October's quarterly conference call, saying, "To address the slowing demand and continued volatility of future volume projections for Truly, we're working closely with our distributors to reduce Truly distributor inventory levels." Just so there was no confusion on the matter, Smalla went on to say, "We adjusted the production and shipments during the third quarter and expect to continue to do so during the remainder of the year."
And it's not just Boston Beer. Constellation Brands (STZ +1.31%) CEO Bill Newlands also admitted in October that the company's plans to double its seltzer production this year were more than a little overzealous. Although it still owns the brands Vizzy and Topo Chico, Molson Coors (TAP 0.21%) decided in July to discontinue its Coors Light hard seltzer brand in the U.S. even though it had only launched in October of last year. Despite the recognizable name, the Coors moniker didn't click with the hard seltzer drinking crowd.
Connect the dots. There's still a market for the young category of beverage, but the market is nowhere near what it was expected to be by this point.
That's an important detail most investors are overlooking.
Important, but not everything
The buzz surrounding the rise of hard seltzer may have been incredible, but its overall fiscal upside remains tempered. The category's estimated sales of around $4 billion in 2020 is only a fraction of the annual beer market that's worth closer to $600 billion per year. Even limiting this comparison to the craft beer market where Boston Beer operates -- and still excels -- the hard seltzer business is still a scant fraction of craft's market size.
Granted, Boston Beer controls more of the seltzer market than it does the beer market, and more of its total top line stems from hard seltzer. S&P Global estimates that Boston Beer's Truly accounted for around one-fourth of 2020's worldwide hard seltzer sales, seemingly driving the bulk of Boston Beer's 2020 top-line growth of nearly 40% -- when Truly generated on the order of half of the company's total sales.
Don't read too much into the numbers, though. The company's 2019 revenue of $1.25 billion was also 25% better than 2018's top line before the global hard seltzer market exploded. And, although overall beer sales were already slowing headed into the pandemic (and then contracted once COVID-19 shook up the world), Boston Beer's iconic brands like Sam Adams and Dogfish are perpetually marketable, as is its well-developed Twisted Tea brand. Truly seltzer could still be fairly categorized as a novelty that consumers are willing to give a try, but it's not yet enough of a recurring staple to make it the sole basis for a stock pick.
Such an evolution for the category of drinks is on the radar, though. Constellation's Newlands commented during last quarter's conference call, "we continue to see the hard seltzer and broader AVA [wines] space as a meaningful sector in the beer market," adding, "We also believe this subcategory will evolve beyond low-calorie, low-carb offerings, and open up to more distinctive consumer value propositions."
In the meantime, the hard seltzer headwind appears to be benefiting beer. Mordor Intelligence estimates the global beer market is on pace to grow at an annualized pace of a little more than 5% through 2026, led by expected sales growth of 14% from the craft beer segment.
One way or another
Don't misunderstand. The advent of hard seltzer was, is, and will be a key part of Boston Beer's business, and will likely outpace beer's growth for the foreseeable future.
Rather, the misstep that sent the stock tumbling is simply one of wild expectations. The market bid this stock up far too much between mid-2020 and April of this year because investors never really crunched the numbers behind the hard seltzer movement, driving shares to valuations that won't be justified for years. These investors corrected this mistake over the course of the past seven months, but they've arguably overcorrected it. Shares are now priced affordably at less than 30 times next year's projected profits of $17.22 per share, en route to analysts' 2023 expectation of $23.13, then 2024's $28.76. Whether it's beer or hard seltzer that gets the bottom line, it doesn't really matter.
Data source: Thomson Reuters. Chart by author.
On that note, know that the stock price is now up 16% from its late-November low. The reflation may already be underway.
