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Is Now the Time to Load Up on a Stein of Boston Beer Co. Inc.?

By Adam Brownlee – Mar 31, 2016 at 4:00PM

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A foamy year of volatility for the brewer of Sam Adams may spell opportunity for investors. Is this a bitter or sweet brew of fundamentals, brand, and value?

IMAGE SOURCE: BOSTON BEER CO.

Boston Beer Co. (SAM 0.13%) has been on a turbulent path over the past year, with a stock price down 31% from its 52-week high of $277.88, exacerbated lately by a recent plunge in early March. Given the fundamentals of the company, its strong brand name recognition, and apparent value, is this a good time for investors to fill up their investment stein with Boston Beer? Let's check these factors first and then see if value is present for the maker of Rebel IPA.

A strong brew of fundamentals
Revenue growth has been strong and steady for Boston Beer, as the company has delivered a 10-year average revenue growth rate of 15%. Earnings have exhibited this same strong and steady pace, with a 10-year average growth rate of 21%. Meanwhile, when it comes to margins, the company is slightly below the beverage industry averages of 60.5% and 22.4% for gross and pre-tax margins, respectively. Boston Beer's come in at 56.7% and 16.2%, respectively.  Most likely this is due to the economies of scale that Boston Beer's larger brethren possess. 

Return on equity for the brewer has averaged 23% over the past 10 years -- superior to the current average U.S. business ROE of 10.77% -- and this metric is picking up steam, as the company has chalked up a five-year average of 27.5%. A look at the balance sheet key ratios for Boston Beer reveals phenomenal financial health, as the 2015 balance sheet reflected zero long-term debt and the current ratio, a measure of current assets divided by current liabilities which describes a company's ability to pay its immediate bills, hovers just above two.

A contagious moat
In a recent consumer engagement study conducted by Brand Keys, Boston Beer came in first as America's favorite regular and light beers, ahead of both Anheuser-Busch InBev and Molson Coors. This is an accomplishment given that Boston Beer has been in business since 1984 and has a market cap of $2.5 billion, while Anheuser has been going for over 140 years with a market cap of $188 billion.  Brand-name recognition provides a durable competitive advantage for the brewer.

Brand loyalty creates contagion-like free advertising, as raving fans influence the purchasing habits of their friends and colleagues, much like when a yawn circles the room or when a smartphone user incites an outbreak of smartphones in a meeting. Brand loyalty can also boost the pricing power of the company, as loyal drinkers tend to dish out extra bucks for their favorite brand.

Patience is a valuable virtue
The P/E ratio for Boston Beer is 25.5, which by itself is not indicative of huge value as the current average P/E for a broad basket of stocks is 21. The P/E ratio represents how much you are paying for every dollar of a company's earnings. In Boston Beer's case you are paying $25.54 for each $1 in earnings. Meanwhile, the average stock costs $21 for each $1 of its earnings. Based on this information and given Boston Beer's expected next year earnings growth rate of 7.9%, it appears that it's fairly priced with some upside potential for investors, but I would wait for the price to come down a tick before actually jumping in. 

In the meantime
Boston Beer is solid to say the least, with sturdy fundamentals and a robust brand moat.  Additionally the stock appears to be fairly priced with good growth prospects. If the price ticks down then it would be time to tip back a stein of Sam Adams and snatch up some of its shares.

Adam Brownlee has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool recommends Anheuser-Busch InBev NV. We Fools may not 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.

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