Unless you've had a few drinks, it's hard at first glance to argue that shares of Boston Beer Co. (NYSE:SAM) are cheap based on traditional metrics. The craft brewer's stock currently trades at 37 times trailing 12-month earnings, and 29.6 times next year's estimates.
But that isn't stopping Boston Beer from buying back its own shares. On Wednesday after the market close, Boston Beer announced its board of directors voted to increase the company's stock repurchase authorization by $50 million, increasing its authorized limit from $350 million to $400 million. Shares of Boston Beer closed up nearly 5% on Thursday as a result.
Is Boston Beer crazy to keep buying back its stock at these levels? And is the market even crazier for bidding up the stock in response? I don't think so.
Don't be surprised
While the old $350 million limit might sound like a lot, as of May 8, 2015, Boston Beer had only $28.3 million remaining under that authorization -- the same figure, by the way, it reported along with its solid first-quarter results last month. We should also remember that, while Boston Beer "only" grew revenue 8.5% year over year, to $199.5 million in Q1, its net income skyrocketed 65% during the same period, to $13.7 million, or $1.00 per diluted share. By contrast, analysts were modeling slightly higher sales, but significantly lower earnings of $0.68 per share.
We also shouldn't expect Boston Beer to exhaust its latest buyback authorization all at once. Boston Beer has a long history of steadily and strategically buying back its shares, then boosting its authorization when it approaches the limit. Last quarter, for example, Boston Beer repurchased a relatively modest 53,000 shares for a total of $14.3 million.
Boston Beer is also flush with cash right now. The company had minimal debt at the end of the first quarter, while cash and equivalents increased nearly 60% sequentially during the previous three months, to $122.2 million. Operating cash flow last quarter came in at $21.2 million.
During Boston Beer's most recent conference call, CLSA analyst Caroline Levy even asked about the prospect for further buybacks given this "excess cash." Boston Beer CFO William Urich responded:
We have a long track record of returning cash to shareholders in buybacks. We have been somewhat selective of the times that we bought back, mostly that has benefited our shareholders enormously. As you note, our cash balances have sort of swelled a little bit, some of that through some capital slowing down, some of through option exercising generating significant sums of cash. And it's something we're looking at closely. [...] I would think it's reasonable to expect that management's intent is to run the business as it has been run in the past, in a similar fashion as it relates to returning cash to shareholders [...].
At the same time, Urich said that consideration came with the usual caveat that Boston Beer management reserves the right to change its mind about how to use its cash. But with his comments above in mind, it's arguably most surprising that Boston Beer's raised buyback authorization caught the market so off guard this week.
This is simply more of the same prudent shareholder value creation to which we've grown accustomed to from Boston Beer. The craft brewer continues to grow and take market share from its larger competitors, which is why I still believe its stock should continue rewarding patient shareholders from here.