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Bill Smith
Bill Smith
Articles (43) 

Buffett-Munger Screener Highlight - Boston Beer Company (SAM)

August 30, 2011 | About:

About the author:

Bill Smith
I'm an IT professional and a private individual value investor with degrees in electronic engineering and business economics. My major investment influence is Warren Buffett--finding "wonderful companies trading at wonderful prices".

Rating: 4.1/5 (23 votes)

Comments

bmichaud758
Bmichaud758 - 4 years ago
FYI, a certain high-profile research firm that is "not on Wall Street" (if you catch my drift) recently initiated a sell-rating on this stock.

I know this is a random comment board and you won't take this seriously, but if you want to save some money, trust me, close your long position.
WIBruin
WIBruin - 4 years ago
The market cap number at the beginning of the article is wrong.
Invest E Gator
Invest E Gator - 4 years ago
Interesting analysis and very in-depth. I have been following SAM for a little while, when the price was about 87 and it has been catching my eye as the price has gone down, but I am still not completely convinced on them yet. Personally, I am not a huge beer drinker, so that makes it more difficult for me to appreciate this craft brewing thing. The few people who I know who are into that kind of stuff seem to be more interested in that which is new and, well, the SAM flagship mark certainly isnt new anymore... Is that a silent alarm bell ringing? I have never personally known anyone who has any particular loyalty to Sam Adams but, then again, I am far removed from the "beer bubble" so its hard to assess. I did attempt to compensate by chugging down a 6 pack but, unfortunately, it wasn't much different than if it was Bud, coors, or whatever.

They do seem neat and all, like how they have many of the same initial stockholders, good balance sheet, they keep stats on how many beers Koch has downed over the years, his personal stake in the company (although I don't particularly appreciate the class A and B situation), and they had an instant sell out of one of their new brands... was it infinitum? There is plenty going for them, but some of their growth, I forget how much off hand, comes from seasonal offerings, or flavor variety packs, specialty things like that. It strikes me that they have to keep churning out "new and unique" to keep the earnings engine going, and I suspect that takes a lot of creative energy, with accompanied risk of getting it wrong at some point. There are plenty of microbrews who would probably love to take their place, the difference between them and the Samuel Adams company might be revolving more around Koch himself... so what if he drops dead tomorrow? With or without Koch, there are still tons of micro brews out there and the market is always full of new and interesting flavors. I drank some Mike's hard lemonade the other day and really enjoyed it, flavored ale might be the next fad and there is no way to say if Sam Adams is particularly positioned for that. Considering that they are already like a big kahuna in the craft beer market, it concerns me that they might become old news as consumers scurry off to something else that has caught their fancy. It looks like a whole lot of hoop jumping required to maintain the same kind of growth for the decade ahead that they had for the decade past. The actions of the company itself would probably say that they disagree, like the share repurchases and how they are switching production from contract to in-house. That's a pretty strong sign that they think of themselves as here to stay.

With all of that in mind, my interest is starting to perk up at 77, and it might even be a more logical buy than some of my other holdings, but my gut just isnt there yet. For their current value compared to growth, I would prefer that they had something more cookie-cutter in nature, like maybe a discount brand growing in popularity or perhaps something more historic/epic/distinct like corona or guiness.

I will certainly be watching them as the story unfolds, but for now I think the price need to go down a bit more to ease my doubts. Plus, I am a follower and fan of the Austrian school of economics and, although optimistic long term, very pessimistic for the near/intermediate term. SAM certainly isnt a bankruptcy risk considering they have no debt, but I would bet that their sales might take a pretty hard hit when/if the economy takes a dive. Eventually it will. However, considering the inherent "neatness factor" of the company, they will probably be much more interesting if the market and world around us was were in panic mode and the stock price was tanked.

If you are reading my commentary, there is one thing that I wondered about as I was reading their stuff, and I didn't see you address it in your analysis. If I remember correctly, they import their hops from Europe with contracts in pounds and euros. Its not a huge % of the beer production cost but I suppose getting specific hops are a pretty big deal. If the dollar drops significantly compared to those currencies, making the hops more expensive, how big of a problem is that? Do they have equivalent replacements that they can get in the US market? How do you adjust for that in your analysis? Currency fluctuations drive me insane.

I would also love to read your thoughts on Brown Forman, makers of fine drinks like Jack Daniels and Finlandia Vodka. People actually get Jack Daniel tats on their body, they are not going anywhere.
Bill.Smith
Bill.Smith premium member - 4 years ago
@Hokeypokey: Thanks for the post and your feedback. I almost missed it--for some reason I'm not getting email updates from comments. I just happened to see it on the GF front page this morning.

For background, I've been a homebrewer for over 12 years and enjoy following the industry. For perspective, if you haven't already, I'd encourage you to read my articles on the industry's midyear results, and my primer on the industry. SAM's been around since 1984.

You mentioned, "but I would bet that their sales might take a pretty hard hit when/if the economy takes a dive." If this recession was any guide, they kept right on selling beer and growing volume in 2008/2009.

On their current price...always buy with a margin of safety. I started looking at it as an investment in 2006, and bought in 2008 at the start of the bear market. What I've noticed over the years is their stock price fluctuates violently, especially around earnings season. Most of the time, it seems to drop down to fair value, and then spikes back up, only to later repeat the process. It's a bumpy ride to be sure. I checked short-float on it this morning at Yahoo, and it's higher than usual, so you may get a better price. But I'm satisfied with the underlying performance of the company, their economics, and their future prospects.

You asked about hop sources. Hops are grown all over the world, and there are American versions of the German varieties. The Pacific Northwest is a good fertile area for American hop production. American varieties tend to be more aggressive than German varieties due to soil and climatic conditions, even amongst closely-related hops strains. It's like the differences between wine grapes grown in France, Germany, and the US. They're all grapes, but there are subtle differences in their flavor profiles. Hops can be substituted in a recipe, but not without some reformulation.

As far as hop prices, SAM puts their hops on 5 year contracts to even out fluctuating market prices. BTW, within the last few years, there was a worldwide hop shortage and prices more than doubled. Since craftbrewers are a brotherhood of sorts, SAM was in the position to donate hops to the smaller craft brewers who were in a pinch because of it. The shortage has since abated.

There are a couple of writing projects ahead of it, but Brown Forman is on my list to get to :-)

Hope this helped.

v/r

Bill

Invest E Gator
Invest E Gator - 4 years ago
Thanks. You are definitely the beer guy I will never be. Its an interesting story that is developing, I am definitely going to sit back and watch the situation brew for a while to see how it unfolds.
adamcz
Adamcz - 4 years ago
"The few people who I know who are into [beer] seem to be more interested in that which is new"

I also wonder about the growth potential, both because of fickle tastes amongst beer geeks, and because of Sam's status as a medium quality brewery. Sam Adams is definitely a much better beer than the Miller/Bud representatives of the status quo, but if Sam convinces people to trade up into tasty beer, how do they then stop them from continuing upstream to the very best beers?

For instance, InBev recently bought Chicago's Goose Island, which makes a number of beers better than what Sam Adams makes (both my opinion, and a general consensus at ratings sites such as beeradvocate). If Sam Adams successfully educates the marketplace, won't the big guys just continue to purchase better beers than Boston Lager?

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