When it comes to investing in beaten-down growth stocks, many investors think first of risky, high-growth tech names that have yet to turn a profit. But I've got my eye on shares of another business in the consumer goods sector that's not only achieved consistently positive cash flows and sustained profitability, but also operates in one of the steadiest industries our market has to offer.
Enter The Boston Beer Company (SAM -1.42%), an alcoholic beverage leader best known for its flagship Samuel Adams craft beer brand, as well as Twisted Tea, Angry Orchard Cider, Truly Hard Seltzer, and a number of smaller craft brews.
The catch? Boston Beer doesn't exactly look like it fits the definition of a growth stock these days. Boston Beer did enjoy impressive top-line gains as alcohol consumption skyrocketed during the pandemic, with quarterly revenue growth peaking at nearly 65% year over year in the second quarter of 2021. Its shares followed suit by more than tripling in less than a year, to nearly $1,300 per share that April.
Boston Beer shares have fallen 74% from that peak as of this writing, as growth grew anemic; revenue in its most recent quarter climbed a modest 0.9% year over year to $601.6 million, as price increases helped offset a roughly 2.5% decrease in overall shipments.
On Boston Beer's quest to recapture long-term sustainable growth
So why am I feeling bold enough to call Boston Beer a compelling growth stock worthy of a spot in your portfolio now?
For one, I think it's on the cusp of returning to more normalized long-term growth. And it's doing so from an even stronger financial position than before.
Gross margin expanded 2.5 percentage points year over year last quarter, for example, to 45.7%, as price increases and procurement efficiencies easily offset the effect of inflation. Boston Beer also generated net income of $45.3 million (or $3.70 per share) last quarter, even after absorbing a $16.4 million non-cash brand impairment charge largely related to the relative underperformance of its acquisition of Dogfish Head Brewery in 2020. Boston Beer also generated positive operating cash flow of $131.3 million during the quarter, leaving it with $310.8 million in cash on its balance sheet with no debt.
In an apparent vote of confidence in the business, management has taken advantage of their strong financial position by repurchasing nearly $70 million in shares between the start of last year and Oct. 20, 2023 (a few days before their most recent earnings release).
"Our highly cash-generative business and strong balance sheet allow us to invest in our brands as we work to return to long-term sustainable growth," stated Boston Beer Chairman and Founder Jim Koch.
What's next for Boston Beer shareholders?
But where, exactly, is that growth coming from? Look no further than its Twisted Tea and Hard Mountain Dew varieties, growth from which has helped significantly offset declines at Boston Beer's other noteworthy brands. Both are within what the company calls its "beyond beer" category, which includes hard seltzers, flavored malt beverages, and ready-to-drink spirits-based cocktails.
At a recent investor event, Koch acknowledged industry estimates showing the traditional beer category could decline at a compound annual rate of 2% over the next five years. But those declines should largely come at the expense of the biggest brewers in the world (noting Boston Beer still commands less than 2% of the United States' beer market). Meanwhile, the "beyond beer" category is expected to grow at a compound annual rate of 5% for the foreseeable future.
Even assuming Boston Beer gains no market share during that period as it builds on its modest $4.1 billion market capitalization, I think you'll be hard-pressed to find an investor displeased with its long-term ability to drive shareholder value through significant operating leverage and growing cash flows in the coming years.
