In its latest quarterly statement, Boston Beer (SAM, Financial) had its best quarter ever with earnings per share of $3.21 on revenue of $306.87 million. After yesterday's 8% gain, the stock is closing in on its all time high. Since my first article on Boston Beer on April 28, 2017, the stock has risen by more than 120%, a rate that has put its price far ahead of the company's value. It's time to sell.
Maybe it was the Red Sox championship run, because the company's stock rose right along with the team's season, with most of its gains coming over the summer. However, unless something extremely positive is afoot behind the scenes, the earnings expectations of $8.50 per share for 2019 just aren't good enough to justify the $320 or higher per-share price tag. In fact, the company is now trading at price multiples well above their five-year average, and it's not growing fast enough to justify those values.
Boston Beer is a craft brewer with a great range of brands from Samuel Adams beers, Angry Orchard and Twisted Tea filling most grocers and liquor stores. At the same time, the number of craft breweries has been increasing at a rapid clip, up 16% in 2017, putting increased pressure on Boston Beer, and making brand building (e.g., more advertising) activities increasingly more important as retailers and restaurants have to be judicious in which beverages they offer.
To Boston Beer's benefit, it is still relatively small. The $3.7 billion market capitalization is puny compared to Anheuser Busch Inbev's $127 billion cap, but the world's largest beer maker generates 55x more revenue, 80x more profit and is priced at a better value.
Of course, if Boston Beer wanted to sell to AB Inbev, I'm certain that its acquisition price would be significantly higher than the current one. That is not going to happen without Jim Koch, founder of Boston Beer, who owns 100% of the votes. So far, he's defied the odds to build one of the best beer brands. Remember, its flagship beer, Samuel Adams Boston Lager, was first introduced less than 35 years ago, in 1984. Today, the company sells around 4 million barrels a year.
The stock has also defied the market. While the other beer makers are down year to date, Boston Beer is up over 65%, really putting a hurt on the short-sellers who have 27% of the float. More importantly, it's unlikely that a downturn in the economy would have an adverse impact on its sales.
On the bottom line, the beer company expects earnings per share to come in at $7.10 to $7.70 for fiscal 2018, with the company adding another $1.00 to the earnings per share in 2019. From that point, it can only squeeze so much out from an efficiency standpoint. The top line will have to grow exponentially to justify the current valuation. If the market revalues the stock at the same price-sales ratio as AB Inbev, Boston Beer would trade back in the $216 range.
Long term, the company isn't going out of business and may eventually justify even higher prices, but without a steady dividend payment, the stock is not worth holding. Take profits or wait for a pullback.
Disclosure: I am not long/short any stock mentioned.
