Care For Some Jim Beam Or Sam Adams?

Includes: BEAM, SAM
by: Valuentum

Leading spirits company Beam (NYSE:BEAM) posted fantastic second quarter results led by strong performance from its established brands. Revenue increased 7% year-over-year (5% on a comparable basis) to $638 million, roughly in-line with expectations. Earnings per share increased 8% compared to the year prior to $0.64, also in-line with consensus estimates. Free cash flow was only $1 million for the quarter, but management continues to predict the free cash flow for the full-year of $300-$350 million.

Beam has experienced comparable sales growth of 4% year-to-date, with premium brands such as Maker's Mark (+18%) and Jim Beam (+4%) leading the way. Basil Hayden's has performed exceptionally well so far this year as consumers show a willingness to try more exotic liquors.

We were slightly disappointed by the performance of Skinnygirl, even though it is facing a difficult comparison from the first half of 2012 (sales were up 80%). Skinnygirl is pegged as one of the long-term growth drivers at Beam, and CEO Matt Shattock addressed the issue at length on the conference call, saying:

"We put lot of innovations, both in cocktails, but also in the adjacent segments of vodka and wine. So we're cycling against that. That cycling is coincident with a very poor summer weather season, and the seasonality of ready-to-serve is particularly high. It's one of the highest of the industry. And because, also, it's an impulse purchase item, it's probably 2 to 3x more sensitive to impulse purchases than other segments of the spirits. If the weather's not there, we won't get the display. So there's a sort of convergence of factors there, which would cause it to go down year-on-year. Looking forward, the prospects, I think, remain strong, and what we will do is continue to build this brand."

We've heard plenty of companies blame weather for weakness, so the excuse is not unique or firm-specific. Frankly, given the mild summer climate across the U.S., we're willing to give Beam the benefit of the doubt in this situation.

Looking ahead, the company reaffirmed its earnings per share outlook of high-single-digit growth on revenue expansion of 3-4% for 2013. Management did warn that foreign exchange could reduce full-year earnings per share by 5 cents.

In the realm of beers, Boston Beer (NYSE:SAM), parent of Sam Adams and Angry Orchard cider, posted stronger than expected second quarter results, with both revenue and earnings per share exceeding consensus estimates. Sales soared 23% year-over-year to $181 million, while earnings per share came in 37% higher than the comparable year-ago period at $1.45. Free cash flow was negative after the firm invested heavily in boosting capacity.

Strength was broad-based, but we're seeing particularly robust distribution growth from Angry Orchard in the marketplace. According to management, Sam Adams' summer beer performed particularly well, with depletion occurring earlier than planned. CEO Martin Roper added some additional commentary, saying on the conference call:

"…we ran out of Summer Ale earlier than that and that's partly due to the acceleration that we're talking about. And so I think in my earlier remarks, I said that we were anticipating a slightly earlier conversion to Oktoberfest. Now what you see at retail is typically delayed a week or so from when the wholesaler runs out and some of the wholesalers let the retail to run out before they put two Seasonals on the shelf."

With the combination of poor weather and faster distribution, we wouldn't be surprised to see even better performance out of Oktoberfest (fall ale) during the back half of the fiscal year.

On the cost side, we saw some modest gross margin compression, as the metric declined 90 basis points year-over-year to 53.6%. Management cited input cost inflation, which we think might be somewhat attributable to the shift toward hard ciders. Nevertheless, we think sales growth and margins look plenty healthy at this time.

Looking ahead, Boston Beer raised its earnings per share outlook significantly to $5.10-$5.40 per share from its previous guidance of $4.70-$5.10 per share. Depletions growth was raised significantly to 17%-22% from 10%-15%, which was forecasted earlier in the year. Management also increased its capital spending guidance to $100-$140 million from $85-$105 million, reflecting robust demand growth.

Valuentum's Take

Though we tend to be big fans of the structure of the alcohol industry thanks to its inelastic demand, favorable demographic trends, and relatively concentrated players, we think shares of both companies look fairly valued at this time.

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.