2013 was a great year for The Boston Beer Company (NYSE:SAM). Shareholders of the company must be quite happy as its share price moved more than 72% last year, from $139 per share to more than $241 per share. The company has also shown decent growth in its top and bottom lines, and delivered a high return on equity.
Boston Beer offers a variety of products under the Samuel Adams brand name. It develops and creates many other malt beverages, so that the Samuel Adams consumers can have the opportunity to try numerous different styles of beverages. In basic terms, it is trying to provide the best possible beer in the U.S. so that people will continue to buy their beer after the original purchase, which will turn their profits into long-term growth of the company worldwide.
The main factor to Boston Beer's success is its product differentiation. Its main strategy to keep itself in the market for alcoholic beverages is by differentiation of tastes to the customers. By offering distinct tastes of many kinds, the company holds a small but strong share in the overall market of beverages that are sold. A strong market position provides Boston Beer with significant competitive advantage as well as stabilizes its financial growth. The company's overall beer market share is less than 1.5% of the total U.S. market, which suggests that still it has plenty of room to grow. However, increasing prices of raw materials may adversely affect its margins.
Boston Beer operates in the brewing industry, and within that, it competes in the craft beer segment, which is the most highly concentrated part of this industry. Despite the economic downturn, the craft beer category has seen strong growth over the past few years. Craft beer sales in the U.S. have doubled in the past six years and are set to triple by 2017. The sales have increased from $5.7 billion in 2007 to $12 billion in 2012, and are expected to reach $18 billion by 2017. As the largest craft brewer in the U.S, the company is thus well positioned to exploit this growing category in the US and enhance its top line and profitability.
Boston Beer has been profitable every year. The company has a strong balance sheet that ensures it has the ability to absorb any recession without reducing growth in capital expenditure. The profitability, capital structure, and liquidity of Boston Beer appears stronger than the averages in the alcohol industry, which shows the stability of the firm. The company uses very little debt to finance its operations, and does not use any long-term debt. Its total debt-to-equity ratio is only 0.23x, as compared to the industry average of 49x. Financial flexibility along with low debt will also provide growth opportunities over the long term by enabling capacity expansion and additional marketing efforts. This will also allow the company to spend funds on R&D and new products and enjoy higher growth in the future.
In 2011, Boston Beer created a Vermont-based subsidiary called Alchemy and Science. The task of Alchemy and Science is to identify innovative and unique products for the company. The subsidiary is focused on the research and development of new brewing techniques to be applied in new geographic areas. The creation of Alchemy and Science further enforces the fact that the company is focused on developing products internally, now more than ever. This trend can be expected to continue as brands such as Twisted Tea and Angry Orchard continue to develop and gain popularity.
Boston Beer sells its products to a network of approximately 340 wholesale distributors, who then sell to a variety of retailers such as pubs, restaurants, grocery chains, package stores, stadiums, and other retail outlets. The good news is that the company has and will be able to maintain existing relationships with its distributors due to its prestige standing in the industry. Newer and smaller firms will have a difficult time building the same kind of relationships based on the marketability of their products. High taxation on alcoholic beverages and strict laws that prohibit the sale to companies without license make it even harder for new companies to gain portions of the market share.
Last year, Boston Beer introduced Sam Can, which allows the company to serve Samuel Adam drinks in cans. Implementation of Samuel Adams in can is a new growth driver to increase market share, while simultaneously cutting long-term costs. According to IBISWorld, cans make up roughly 54% of beer sales versus bottles which come in at 36%. This represents a huge opportunity for sales growth by shifting towards the sales of canned beer. This new offering also represents an attempt to push back against the increasing pressure of the larger brewers and to increase the scope of the Samuel Adams marketplace.
Boston Beer is now technically competing with companies such as Anheuser-Bush InBev (NYSE:BUD), Molson Coors (NYSE:TAP), among other large producers. In the craft beer category, Boston Beer competes with hundreds of other craft brewers. It is difficult to accurately compare Boston Beer to these companies because most craft beer brewers are privately held. One of the only public craft brewers is Craft Brew Alliance (NASDAQ:BREW). Boston Beer does not have any public competitors that closely mirror its operations, so we will look at look at all three of these companies as well as the industry, and compare them to Boston Beer.
Boston Beer's financial performance is largely dependent on the market conditions. If we are to see a second dip in the market, the company may be greatly affected by it. Also, if Boston Beer is to meet increased competition or to see pricing measures intensify, this would have a great effect on its performance as well. If the largest beer producers, Anheuser-Busch InBev and Molson Coors become even more successful with their craft beers, this would result in those companies stealing market share from Boston Beer.
Boston Beer is a great company, with a good position in the U.S. beer market. Boston Beer is and appears that it will continue to be a very profitable firm with positive trends. As long as the craft beer market continues to grow as it has, it should be fairly easy to predict that the company's sales and net income will rise along with it. It has proved to be efficient by maintaining positive trends in profitability, and by using strategic capital structuring in the firm. In my opinion, Boston Beer is a good buy right now.
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.