Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Boston Beer (SAM 3.85%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Boston Beer's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Boston Beer's key statistics:
SAM Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
44.9% |
Pass |
|
Improving profit margin |
9.9% |
Pass |
|
Free cash flow growth > Net income growth |
(79.5%) vs. 59.2% |
Fail |
|
Improving EPS |
68.9% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
204.6% vs. 68.9% |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
SAM Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
10.9% |
Pass |
|
Declining debt to equity |
Debt raised in 2012. |
Fail |
Source: YCharts. * Period begins at end of Q2 2010.
How we got here and where we're going
Boston Beer puts together passable performance, earning four out of seven passing grades. Two key areas of concern are the divergence between free cash flow and net income, and the discrepancy between share price growth and earnings growth. Boston Beer could easily pay down its minuscule debt and gain another passing grade next time, so let's dig a little deeper to find out what Boston Beer is currently doing to improve its other fundamentals.
According to the Beer Institute, the U.S. hard cider market was estimated at 690,000 barrels in 2012; but that small slice of the beer market has been posting incredible growth rates -- it was up about 88% year over year in the first quarter of 2013. However, as hard cider makes up less than 1% of the entire beer market, it still has lots of room to grow. Fool contributor Rich Duprey notes that Boston Beer's Angry Orchard cider brand has claimed the top of the market since its launch last year, surpassing C&C Group's Vermont Hard Cider brand, the previous market leader.
However, Boston Beer's hardly alone in seeking to tap this exciting new growth segment. The global cider market is growing by roughly 10% every year, and Anheuser-Busch InBev and Heineken have rolled out three new cider brands: Stella Artois Cidre and Michelob Ultra Light Cider for the former, and Strongbow for the latter. Miller Coors, the joint venture of SABMiller and Molson Coors, recently acquired Crispin Cider to extend its reach without building a brand from the ground up. Beam also introduced a hard cider version of its Skinnygirl brand, which exploits the brand's strong female ties. Boston Beer might face major headwinds as more ciders seep into the market.
However, Boston Beer continues to push its flagship Samuel Adams brand, which is available in a can for the first time ever. My Foolish colleague Rich Duprey points out that this new offering will help Boston Beer evade the glass bottle restriction in place at most public spaces, such as beaches and ballparks. Since the overall beer market has been rather stagnant of late, Boston Beer needs to find every possible angle for future growth, and this is a good way to do so.
Putting the pieces together
Today, Boston Beer has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
