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John Engle
John Engle
Articles (175) 

Can the King of Craft Beer Keep Its Throne?

The maker of Sam Adams faces growing competition, but retains many advantages

February 12, 2018 | About:

After a few stumbles, the Boston Beer Co. (NYSE:SAM) is looking to regain ground in the craft beer market it played a large part in creating. The maker of popular Sam Adams beverage products, Boston Beer is a leader in America’s beer market. It holds a robust position in the marketplace with a widespread distribution network nationwide and many production locations. Further, the brewer sits in a strong place financially, with robust earnings. Given all of this, the company looks well-positioned to improve its standing as well as to expand the boundaries of the craft beer marketplace.

At the center of it all

Boston Beer is one of the biggest craft brewers in the United States, and has been brewing craft beer for decades. As a leader in the industry, the company would be the brand best positioned to reinvigorate the fairly stagnant craft beer market. Sales are not dropping, but nor are they growing nearly as much as these brewers would like to see.

Boston Beer continues to offer new and exciting products and to expand its footprint within the craft beer industry. While challenges persist from a raft of craft brewers of various sizes, the company continues to benefit from the advantages of scale and incumbency, with access to robust distribution channels, large salesforce and healthy marketing budget.

It is important to recognize that, while known for its Sam Adams brand, Boston Beer is more than just a craft brewer. It produces a wide range of beverages, including hard ciders and teas, as well as fairly recent additions in the hard soda and seltzer markets. This diversification of product line further differentiates Boston Beer.

Healthy financial picture

On the earnings front, Boston Beer has held up well. Over the last four quarters, earnings have continued to grow, with sharp incline. Importantly, the company has also outperformed the market’s earnings expectations each of the last four quarters, with surprise percentages of 47% in fourth-quarter 2016, 73% in first-quarter 2017, 82% in second-quarter 2017 and 51% in third-quarter 2017. The third quarter saw the highest-ever earnings per share of almost $2.80.

Furthermore, Boston Beer’s balance sheet is enviable. Total revenue continued its upward trajectory, hitting almost $1 billion in 2016 and gaining in 2017. Gross profit came in at $460 million in 2016, showing the company can produce strong growth without overspending. The main expenditure comes from selling, general and administrative expenses, particularly sales and marketing expenses involved in expanding and pushing the brand.

Virtually every indicator is positive for Boston Beer. Earnings before interest and taxes (EBIT) stood at $137 million at the end of fiscal year 2016, and continued to grow in 2017. Net income is positive, assets and equity are strong and expenses are relatively light. As a purely financial matter, Boston Beer is in great shape.

A question of leadership

Boston Beer is one of the major players in the craft beer industry and one of the largest breweries. It also has a storied history. The folks at Boston Beer have been at this a long time, and they know what they are doing. Now, this does not mean new blood and ideas are not needed. On the contrary, they are welcome. But the proven leadership of Boston Beer is one of its most prominent strengths as a company.

Founder Jim Koch, Harvard-educated B.A., MBA and juris doctor, started the brewery in 1984 after time as a consultant at the Boston Consulting Group. He continues to serve as the chairman of Boston Beer and lends his expertise, leadership and knowledge to the company as it looks to the future. Koch is also seen as one of the strongest and most effective voices for the craft beer industry, and it serves the industry to have him at the helm of Boston Beer. In the coming years, change will ultimately come to the industry, so solid, tried-and-tested leadership will be crucial to the company’s success.

Verdict

In this market, despite recent corrections, there is no significant reason to believe Boston Beer will not continue to grow. It is well positioned with impressive distribution networks, has excellent marketing and brand recognition and is an already high-achieving brand. Unless something unexpected comes to derail this train, we expect it to continue down a positive track.

Disclosure: I/We own no stocks discussed in this article.

About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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