Over the last 15 years analyzing and forecasting stocks, the one bit of criteria that has produced more big winners outside of Warren Buffett (Trades, Portfolio)’s 12 tenets is buying closer to 52-week lows than 52-week highs. For instance, it would have been better to buy Coca-Cola (KO, Financial) a year after its initial public offering than on the day it began trading publicly.
Boston Beer Co. Inc. (SAM, Financial), with the stock trading really close to its year low, is an incredible investment opportunity. At the open, the stock was $144 to $145.
Now, some may look at the stock trending down as more reason to continue shorting. Of course, those people typically catch falling knives because they are too worried about short-term events. Meanwhile, long-term investors will generally look more at the underlying business and brand, welcoming lower prices as a way to dollar down on an absolute cost-value basis.
That said, the short float is pretty high at 25%. Boston Beer is off 17% year to date, with the company's Samuel Adams and Angry Orchard brands struggling of late. The company reported first-quarter EPS of 45 cents, beating analyst estimates by 20 cents but missing on revenue. In the grand scheme of business, one quarter is not going to make or break a company. Sears Holdings (SHLD, Financial) has posted losses for a decade and it is still around, for now.
What matters here is the next decade or longer, and whether the company will continue its growth. In 2007, it produced $22 million in net income on $342 million in sales - $1.53 per share on total equity of $9.41 per share. Last year, the company did $87 million net on $906 million in sales - $6.79 per share on total equity of $36.40 per share. In other words, net growth across all key metrics has been stellar.
The company pounds out cash, posting over $96 million in free cash flow in the last 12 months. Analysts have been calling for a dividend, but with this kind of return on invested capital, I do not think that is necessary yet. Personally, I would rather see the company double sales, continue to buy back stock and boost earnings and book value than give me any taxable income.
The big risk for Boston Beer comes from the plethora of microbrewers that are en vogue right now across the United States.
The company has 60 different Samuel Adams beers, 20 Angry Orchard hard cider beverages, 13 Twisted Tea malt beverages and more than 40 A & S beers in its portfolio. These segments create an incredible brand with zero long-term debt and close to $100 million in net cash - perfect for acquiring smaller regional and local brands.
Boston Beer is still relatively small. Its market cap is $1.7 billion and it can easily build through better acquisitions. A strategy I would much rather see than simply paying dividends. At this price, it is unlikely Jim Koch, founder and 100% owner of the voting B shares, will decide to sell the business. It think it is a safe bet the 67-year-old will be able to grow the business for another 10 to 20 years.
Disclosure: I have no position in SAM, but may initiate a LONG in the next 72 trading hours.
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