Monday, June 20, 2011

Is a Tall, Cold One the Cure for These Market Blues?

Sam Adams is not my favorite beer.
But Sam Adams is good beer. I like good beer. That's why it felt nice adding a few shares of Boston Beer (SAM) to my portfolio a little while back.
Of course, liking good beer was not the only reason I bought some shares of SAM. I also liked the story. I liked the growth. I liked the possibilities, and I liked the company's chairman, Jim Koch. You may know him from the commercials.
Koch has had Boston Beer brewing up some frothy growth in recent years.
Annual revenue growth since 2007 has rung in around 12%, Earnings over that period have grown an impressive 38% a year. It posts wide margins and also has virtually zero debt.
The numbers tell a great growth story.
But it's the story behind that story that interests me more. Over the past 10 or 15 years, the beer-drinking world has changed.
Not long ago, there were Bud/Miller/Coors drinkers and there were beer snobs and there weren't too many in between.
Not anymore. And Sam has been able to appeal to drinkers meandering toward the center from both poles.
Its flagship Boston Lager and Summer Ale are plenty palatable to those with less adventurous taste buds. And its breweries have been hard at work offering a wide variety of brews to keep those beer aficionados interested.
Do a Google News search for the company. Most of the stories you'll find are about beer. They're not financial stories. I like that. It seems a bit of reassurance that this stock is not overhyped.

The bad
Sam's sales growth has slowed since its peak in the spring of 2010. That could spell trouble for a stock that was being priced like a fast mover.
Here's a quick look at the annual sale growth charts through December:

Now the look of the last 5 quarters:


There's some speculation that SAM's run as a growing "craft" or small brewer has come to an end. That would indicate slower growth in the future. Here's one take on why that might be. Here's another view.
The company is also dealing with higher grain and hop prices. With competition intense among brewers large and small, its ability to raise prices would appear limited.

The bottom line
Sam has disappointed recently and that has me concerned. But its stock has pulled back in price from a $101 peak to its current $86.16. It now sells at a price-to-earnings ratio of 24.9. That's not much greater than the 20.4 that Budweiser parent Anheuser-Busch InBev (BUD) sells for, and that's a much larger producer with far less room to grow in coming years.
From that perspective, Sam does not look overpriced. It also does not have the appetizing appeal of a tall, cold Revolutionary Rye Ale, either.
The company needs to continue growing, and that means it needs to continue appealing to those craft beer drinkers with new brews that draw their interest.
I have faith that Koch will keep the company moving in that direction.
But my affinity for good beer and appreciation for Koch's efforts probably caused me to pull the trigger on SAM too early this spring, when I paid about $89 a share. I don't want to make the same mistake again, especially since the stock has been falling.
I'm in no rush to add to my shares of SAM, but I am keeping it on my radar screen this summer.

What do you think of Sam Adams stock? How about its beer?


  1. First off, I am going to open a bottle of the Rustic Saison....Ok now I'm ready to reply :)

    I think SAM sets up beautifully for a nice beat and raise in the next quarter or two. My thesis is fairly simple. For one, the stock and analyst expectations have come down nicely. Secondly, the latest commodity bust should help lower input costs for SAM. Third, the dollar has strengthened (and I believe will continue to) vs the Euro. Since SAM buys hops in Euro and sells beer in USD, dollar strength will help margins.

    SAM also continues to be extremely shareholder friendly. They have an impeccable balance sheet and continue to buy back their stock. Coupled with a summer tax break derived from lower energy prices I expect Americans to be joining me in drinking some tasty Sam Adams beers!

  2. Good points. I think you're right on the commodity costs boosting the bottom line in the coming quarter.
    I like SAM to continue grabbing market share. I never used to be a big drinker of SAM beers, but I've been impressed by a number of their newer beers over the past few years.