When I began investing, I was starting from a knowledge base of zero.
One of the first books I read was The Motley Fool's Rule Breakers, Rule Makers. In it, Motley Fool co-founder Tom Gardner laid out specific criteria for crowning a company a "Rule Maker" -- a mature, consumer-facing business that's king of its market space, and an investment that can confidently and profitably be held onto for years with only quarterly check-ins.
His step-by-step process for analyzing a business was an easily understandable way for a beginner like me to quickly get up to speed, but its back-to-basics approach will benefit even advanced investors. Today we're going to run craft-brew king Boston Beer (NYSE:SAM) through Tom's merciless gauntlet, and see if it has what it takes to make the Rule-Maker grade.
1. The mass-market, repeat purchase of low-priced goods
Buy, drink, repeat. That's the beauty of any beverage company, but especially one that makes beer. And while none of the Samuel Adams brews are cheap in a relative sense, they're cheap enough in an absolute sense to keep you coming back for more. As such, Boston Beer easily makes our first Rule Maker grade.
2. Gross margin
Gross margin indicates manufacturing efficiencies, brand power, and pricing power. The ideal gross margin for a Rule Maker is 60%.
- With a gross margin of 55% trailing twelve months, Boston Beer falls shy of our benchmark, but not terribly so; 55% is solid.
- The self-styled King of Beers, Anheuser-Busch InBev (NYSE:BUD), manages a bit better, at a 58% TTM gross margin (as well it should, with the economies of scale available to it).
- Molson Coors Brewing (NYSE:TAP), given its size, should be doing much better than a gross margin of 41%.
- Finally, European brewing giant Heineken (OTC: HINKY) comes in dead last, at 37%. Try harder, Heineken.
3. Net-profit margin
Net-profit margin dictates how many pennies a company gets to keep from every dollar of sales. Tom Gardner likes to see net-profit margins of 10% for his Rule Makers.
- Boston Beer edges nicely past our benchmark, with a 10.4% TTM net-profit margin.
- No slacking here, Anheuser-Busch comes in at a big 18.04% TTM net-profit margin.
- Molson Coors also has it's house clearly in order, with a 15.5% TTM net-profit margin.
- Heineken comes in solid on this metric, with a 9.17% TTM net-profit margin.
4. Sales growth
Year-over-year sales, or revenue, growth counts even for big companies, where it will naturally slow with age, because it's an indicator of business momentum. Top-tier rule makers grow their sales by 10% every year.
- With 10.1% YOY sales growth, Boston Beer investors can raise a glass.
- Anheuser-Busch investors? Not so much, with YOY sales growth of -0.8%.
- Molson Coors hits a solid 7% here.
- Heineken pulls up second to last on this metric, with YOY sales growth of 5%.
5. Cash-to-debt ratio
Rule Makers should be cash heavy and debt light, ideally having at least 1.5 times more cash than debt:
- $41 million in cash and $628 thousand in debt give Boston Beer the beautiful, and rarely seen, C/D of 65.3.
- $3.8 billion in cash and $39.8 billion in debt give Anheuser-Busch the extraordinarily unenviable C/D of 0.10.
- $516 million in cash and $4.9 million in debt leave Molson Coors at the bottom of the beer barrel, as well, with a C/D of 0.11.
- Finally, $952 million in cash and $12.1 billion in debt give Heineken the worst C/D of all: 0.08.
Money is so cheap right now. Too cheap. As such, too many companies are in debt up to their corner offices. When the bad times come, which they always do, the companies with the most cash and least debt will be better able to ride them through to the other side. A big, foamy glass raised to Boston Beer on this metric, then.
6. The Foolish Flow Ratio
The Foolish Flow Ratio measures how well a company manages its inventory and cash. A company should be keeping its inventory and accounts receivables low, and its accounts payables high -- strong indicators of market-space dominance.
To calculate the Foolish Flow Ratio, take current assets minus cash, cash equivalents, and short-term investments, then divide by current liabilities. The acceptable upper limit for the Foolish flow ratio is 1.25, but the lower the number, the better:
- At 1.27, Boston Beer scoots just past our benchmark.
- Anheuser-Busch has the absolutely fabulous F/F of 0.35.
- Molson Coors is right in the pocket, too, with an F/F of 0.58.
7. Your familiarity and interest
What's in a name? Quite a bit. Your familiarity and interest with a company help you understand exactly what it does, and how it makes money, thereby lowering your overall investing risk.
Boston Beer is pretty popular and pretty well-known, especially for not having near the size and global reach of Anheuser-Busch, Molson Coors, or Heineken. And, if you know and like to drink the Samuel Adams range, then all the better for you as an investor.
Cheers to Boston Beer!
Boston Beer misses two of our benchmarks -- gross margin and Foolish Flow -- but not by much, and easily hits or surpasses the rest. I especially like the fact it has such a strong cash-to-debt position. That's so rare in a company these days, yet so important. Boston Beer is a classic Rule Maker, a strong all-around company that delivers consistently for investors over the long term.
But always remember to check in on your Rule-Maker investments once a quarter by running them through this simple checklist. In Rule Breakers, Rule Makers, Tom Gardner goes into even greater depth and detail about what exactly makes a Rule Maker a Rule Maker. So I suggest you pick up a copy for yourself and get the whole story from the man who wrote the book on it.
The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services have recommended buying shares of Boston Beer and Molson Coors Brewing. The Motley Fool has a happening disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.