Samuel Adams In Cans Will Justify Boston Beer's High Price Earnings Multiple

| About: Boston Beer (SAM)

Since 1984, Samuel Adams and its Boston Lager beer has been a staple in the craft brew industry in the United States. Boston Beer (NYSE:SAM) prides itself in being one of the top craft beer brands in the nation with a relatively small 1% market share in the United States. That small number could be set to explode with the company's expansion into cans for the first time.

The company's initial expansion into cans will begin with Boston Lager and its seasonal Summer Ale beer. Summer Ale is typically available from March through July. Boston Beer has announced Summer 2013 as a tentative release date. Beer will be available in 12 packs for a suggested retail price of $14.99 to $17.99.

The canning program has been rumored since last year. Boston Beer has spent lots of time making sure it got the can right to lock in the flavor. Company founder Jim Koch was adamant about not distorting the taste with the aluminum can. "I've been the holdout, I've been the purist," Koch said. The company finally got the can right with a new hourglass curve and wider lid that allows beer to flow out nicely.

By canning beer, Boston Beer opens up several new revenue sources. Canned beer will now allow Sam Adams fans and new drinkers to enjoy the beers in sports arenas, on airlines, on beaches, and other places where bottles have no home. Sam Adams will now compete more directly with larger beer brands from AB Inbev (NYSE:BUD), Molson Coors (NYSE:TAP) and SAB Miller.

Boston Beer has already announced that they will expand the canning program to other beer brands if this is a success. In 2012, the company bottled over 50 different kinds of beer, including new brands like Double Agent, White Lantern, and Hopology IPA. The company has different seasonal beers that would sell well in cans, especially during the summer.

Prior to the canning announcement, revenue was expected to grow at a double digit pace. The addition of canned beer will create millions of dollars in additional revenue. Shares are now not pricing in the potential of cans. If shares carried a high price multiple before, what will they trade at going forward?

The company was asked questions about canned beer revenue during its fourth quarter earnings call. Executives simply said that it was priced in based on a summer release. With such a big expense and risk, I have to believe that the company is being conservative with guidance and will beat its own and analysts' guidance.

The downside to canning beer is the costs associated with it. The company will have to redo several production facilities. Gross margins, which are currently in the 56% range, will also likely take a hit. It may take several years for Boston Beer to see profits come back from its costs associated with canning.

In the fourth quarter, Boston Beer saw revenue grow 8% to $153 million. Earnings per share fell to $1.25, because of a 14 week period last year. For the full fiscal 2012, earnings per share were $4.39. This is down from last year's $4.81, which included a one time savings of $0.92 and an extra week. Depletions grew 16% for the most recent fourth quarter.

Another way Boston Beer is rewarding patient shareholders is share buybacks. In 2012, the company bought back 165,000 shares for a total of $18 million. So far in the first quarter of 2013, Boston Beer has already bought back 82,000 shares for $11.5 million. There is over $18 million remaining on the Board of Directors current authorized buyback program.

In 2013, Boston Beer expects to earn $4.70 to $5.10 per share. Analysts on Yahoo expect earnings per share of $5.05. Shares were down Wednesday on the earnings miss and trade at $149.00. This is close to a fifty two week high and well above the yearly lows of $94.24. Shares look expensive on a price to earnings multiple. Little information is known on how sales can translate to the top and bottom line for Boston Beer. If any company can get it right, it's Sam Adams.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.