What happened? Why did shareholders vote with their feet? Well it seems the company’s EPS fell 36% compared to last year, missing the analysts’ $0.45 estimate. This net income shortfall came from increases in operating expenses, mainly in marketing and promotional spending and related personnel additions of $6.4 million.
Their increased costs in this area are nothing new — they’ve previously documented it. These are planned expenses. Even though this quarter is seasonally softer historically than the remainder of the year, the company maintains their full-year EPS guidance of $3.45 to $3.95.
Anecdotally, I’d say their advertising and marketing are working. Judging by the numbers, it’s obvious consumers want their beer. Net revenue rose 9% to $102 million, core shipments increased 10% to 502,000 barrels, and depletions (which measures the inventory reduction from wholesaler to retailer) increased 7%. They continue to grow. In fact, the craft beer category represents the one oasis of growth in the overall brewing industry.
If we assume the company kept their same level of marketing last year, and backed out the extra $6.4 million they spent, this would’ve increased their EPS by about $0.44 to $0.72, and would’ve handily beat the analyst estimate. Had they done this, possibly the market would’ve reacted differently yesterday. But, not spending on advertising and marketing would be extremely short-sighted as there’s been a resurgence in recent years of smaller, craft beer competitors.
It wasn’t long ago Boston Beer Company only brewed one-third of their volume in-house--the rest was contract brewed. Now they brew 95% of their volume in-house due to the purchase of their Pennsylvania brewery in 2008. There is still no mention of a new brewery purchase in the next few years. However, I believe sometime in the next 5 or 6 years, they’ll want to purchase one in the West to increase brand penetration and reduce shipping and production costs.
The quarter’s results don’t seem as dire as yesterday’s stock price drop would indicate. It does, however, present the long-term investor with an opportunity to buy this small and growing company at a fair price now, which I currently estimate at $83.
For additional perspective, see my following related articles:
Original Analysis - Boston Beer Company - A Small Brewer Buffett Would Love
Boston Beer Co. (SAM) – 2010Q4 Over-Reaction?
Have A Microbrew—Tailwinds For The Craft Brewing Industry
The BEER Act Is Good For Boston Beer Company
DISCLOSURE: Long SAM since Nov 2008.