Boston Beer Company (SAM, Financial) held their earnings call yesterday. Afterwards, SAM plunged 11% in after-hours trading after missing consensus expectations even though they reported a record quarter and fiscal year. Over-reaction? I think so.
SAM reported:
What concerned some of the analysts?
Costs: SAM expects to increase 2011 prices by 1%, roughly in-line with inflation. This is a good sign, as it means they command a premium price for their product and adjust for inflation. They’re at the tail end of recovering from a hop shortage in 2008-2009 which increased costs on this vital ingredient, of which they weren’t able to completely pass the cost on to the consumer. However, they maintain fat gross margins and have increased them for the year.
Competition: SAM has been here before. After the microbrewery movement exploded onto the scene in the 1980s, there was an industry shakeout and many breweries died off. The cycle is repeating again with more breweries popping up. At some point, I’m sure there will be another consolidation and I expect SAM to be able to navigate and survive this again. This time, they have the presence, mind-share, increasing scale, and wholesaler relationships to help them.
Assessment: As a partial-owner, they’re doing the things I’d expect. I see a brewery that increased volume, sales, core shipments, and depletions while being able to keep pricing with inflation. They’re focused on the future and making the necessary short-term expenses to achieve longer-term growth of the brand. They’ve increased their advertising budget and they’ll be augmenting their sales staff to address increasing competition. They didn’t overpay on their share buyback, paying well less than my estimate of intrinsic value. Lastly, they continue to maintain a slug of cash and remain out of debt. My assessment of estimated owner earnings for 2010 = $55M. Actual owner earnings for 2010 = $54.3M. The 2011 owner earnings estimate is $63M. At present, a brewery purchase is not factored into the intrinsic value estimate.
Intrinsic Value: currently remains unchanged at $83.
SAM 2010-Q4 Announcement
See my original assessment of Boston Beer Company
Disclosure: Long SAM
SAM reported:
- Strong sales and execution; net income improving to $12.2M compared with $7.5M last year
- Net revenue rose 8% to $115.7M compared to $107.19M last year, due to core shipment volume gains and minor improvements in pricing
- Depletions growth up 12% for the quarter; 11.5% for the year (Note: depletions growth measures the inventory reduction from wholesaler to retailer.)
- Core shipments increased 7% for the quarter; 12% for the year (Note: core shipments measures SAM’s shipments to wholesalers)
- 2010 core gross margins increased to 55% compared to 52% for 2009
- Increased advertising, promotional and selling brand investment 16% to $14.1M
- EPS of $0.87 for Q4; $3.52 for the year (Note: their 2010 EPS guidance called for $3.30 to $3.60)
- Repurchased 1.1M shares @ $68M on share buybacks (average price = $61.82/share)
- Year-end cash = $49M
- Year-end debt = $0
- 2011 EPS guidance: $3.45 - $3.95 (which includes the impact of their Freshest Beer Program of $0.20 - $0.30 per share)
- SAM expects to increase unit costs 1%
What concerned some of the analysts?
- Consensus Q4 EPS was $0.90; SAM missed by $0.03
- Consensus revenue was $118.53M; SAM missed by $3M
- Concerns about the pricing environment going forward
- Competition in the space—Jim Koch said: “While we continue to see expanded distribution of domestic specialty brands and local craft brands, which is increasing competition in the category, we are happy with the health of our brand portfolio”
Costs: SAM expects to increase 2011 prices by 1%, roughly in-line with inflation. This is a good sign, as it means they command a premium price for their product and adjust for inflation. They’re at the tail end of recovering from a hop shortage in 2008-2009 which increased costs on this vital ingredient, of which they weren’t able to completely pass the cost on to the consumer. However, they maintain fat gross margins and have increased them for the year.
Competition: SAM has been here before. After the microbrewery movement exploded onto the scene in the 1980s, there was an industry shakeout and many breweries died off. The cycle is repeating again with more breweries popping up. At some point, I’m sure there will be another consolidation and I expect SAM to be able to navigate and survive this again. This time, they have the presence, mind-share, increasing scale, and wholesaler relationships to help them.
Assessment: As a partial-owner, they’re doing the things I’d expect. I see a brewery that increased volume, sales, core shipments, and depletions while being able to keep pricing with inflation. They’re focused on the future and making the necessary short-term expenses to achieve longer-term growth of the brand. They’ve increased their advertising budget and they’ll be augmenting their sales staff to address increasing competition. They didn’t overpay on their share buyback, paying well less than my estimate of intrinsic value. Lastly, they continue to maintain a slug of cash and remain out of debt. My assessment of estimated owner earnings for 2010 = $55M. Actual owner earnings for 2010 = $54.3M. The 2011 owner earnings estimate is $63M. At present, a brewery purchase is not factored into the intrinsic value estimate.
Intrinsic Value: currently remains unchanged at $83.
SAM 2010-Q4 Announcement
See my original assessment of Boston Beer Company
Disclosure: Long SAM
