Boston Beer Continues Its Phenomenal Run In Q3

| About: Boston Beer (SAM)

There's only one word to describe Boston Beer's (NYSE:SAM) third-quarter results, and that is 'impressive.' Net revenue jumped 30% from the same period a year ago thanks to core shipment growth of 29% (993,000 barrels), while net income per diluted share from the period tallied $1.89, an increase of $0.36 per share from last year's period. Third-quarter gross margins were at the midpoint of the company's annual gross-margin target between 52%-54%, so cost pressures (increased brewery processing costs and higher ingredient expenses) were largely expected -- the measure was roughly 3 percentage points lower than the year-ago mark. The growth of depletions-the total beer volume sold to retailers, excluding product loss due to breakage and samples-was 26% and 23% from the comparable 13 and 29 week periods in the prior year, respectively.

Looking ahead, full-year 2013 depletions growth is now estimated to be between 21%-24%, up from the previous range of 17%-22%. Management attributed the strength to growth in Samuel Adams, Twisted Tea, and its Angry Orchard brands. Boston Beer's full-year 2013 earnings-per-diluted share is now estimated in the range of $5.05-$5.35, a decrease from the previous range of $5.10-$5.40. The earnings target reduction is primarily due to brand investments that will have long-lasting benefits, so we're not reading too much into it, especially considering the firm's fantastic expected depletions growth. Demand has been so strong that Boston Beer upped its full-year (next year) 2014 capital spending plans (now $140-$180 million, was $100-$130 million) to better deal with product shortages and service issues prevalent during the third quarter. For 2014, depletions and shipments percentage growth is expected to be in the mid-teens.

Boston Beer continues to capitalize on the trends of the US beer business. Full-calorie mass domestics once accounted for 99% of the US beer business, but today they have less than 25% share. Light beers, craft beers, imports, ciders, FMBs (flavored malt beverages), and domestic specialties have all benefited from the changing taste of the US beer consumer. The firm's Samuel Adams offering is one of the largest craft beer offerings in the country, and its Angry Orchard cider has become one of the top US ciders in a very crowded field. The hard cider category comprises less than 1% of US beer consumption, and the category is growing at a 50%+ annual clip. This presents a tremendous opportunity for Boston Beer. The company's Twisted Tea consumption continues to expand, and while its category growth isn't as large as that of the cider category, significant opportunities remain.

Valuentum's Take

Boston Beer does not operate in a vacuum, and substantial competition exists in all beer categories. During the past few years, for example, new craft breweries have opened up at a record pace, averaging nearly two per day. There are retail constraints to craft-and-specialty brew proliferation in the US - for one, there is only so much shelf space. We fully expect depletion growth to remain fantastic for Boston Beer for the foreseeable future, but the company's current share price assumes the pace of growth will continue almost indefinitely. We don't think this will be the case and maintain our view that shares are overpriced. It may take years for the company's fundamentals to catch up to its current earnings multiple, which stands at about 45 times.

Anheuser-Busch Inbev (NYSE:BUD) and MillerCoors (NYSE:TAP) comprise over 90% of all US domestic beer consumption, excluding imports, and face the greatest risk from competition related to heightened craft and specialty brew consumption in the US.

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