Boston Beer (NYSE:SAM) and its Samuel Adams brand helped to redefine beer and kick off the craft beer revolution in the United States. Success breeds competition, though, and while just a few years ago Boston Beer had a claim over most of the craft-beer shelf, today the field is crowded. Can Boston Beer rise above the rest, or will it be squeezed between small local breweries on one side and global beer giants on the other? To help you decide, we've compiled a premium research report filled with everything you need to know about Boston Beer's prospects, and what sorts of risks the company faces.
Nobody doubts that execution at Boston Beer has been strong, and the company could continue to grow sales impressively, but an investor needs to have an idea of how large Boston Beer's market opportunity could be. Today, you can get a sneak peek at the report, detailing one major risk that Boston Beer shareholders face: the idea that the company might be overvalued.
Your sneak peek follows.
The biggest risk for an investor today is that shares of Boston Beer are priced not only to beat all these risks, but the company is priced to perform pretty close to perfectly. The decline of the core Sam Adams brands demonstrates that the larger Boston Beer gets, the more difficult it will be for the company to put up the same kind of rapid growth figures it has in its past. Going forward, strong growth is going to come at a higher cost for Boston Beer as the company can't rely on improved distribution of its existing products, and instead must constantly invest in new styles. Boston Beer's cost of goods sold has been rising faster than its revenue for the past decade, and with consumer demand for ever more variety, it isn't clear that Boston Beer will be able to reverse this trend.
The sheer size of the company will also prevent Boston Beer from repeating its past performance. Yes, Sam Adams is only 1% of the American beer market, which seems quite small. Cast another way, however, Sam Adams has about 18% of the total craft beer market as of 2011. The company is facing three potential ceilings.
First, how much market share can Sam Adams take in the craft beer segment, facing strong competition from regional and local brewers? Second, how much market share can the total craft segment take from the overall beer market, as the major brewers fight back with "faux craft" offerings? Finally, as wine and spirits continue to grow at the expense of beer in the alcoholic beverage market, how large will the total domestic beer market even be in 10 years?
To justify its current valuation, with a price-to-earnings ratio around 35, Boston Beer will either need to muscle aside its competitors to capture closer to half of all craft beer sales, or the entire craft segment will need to double or triple again even as the overall beer market declines.
Fool contributor Daniel Ferry has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.