The recent market pullback has enabled me to initiate a position in one of my favorite stocks and beer, Boston Beer (NYSE:SAM). The action in the stock has been very bullish even though the market has had a nice pullback of around 8%. This is where you weed those stocks which are holding strong, and when the opportunity arises, you initiate your position.
As always, I only invest 1% in my portfolio on every stock to manage risk. Most of my recent buys have been stopped out, but with a small risk, the portfolio survives.
This article will present the bullish case for SAM, talk about some risk factors and present a technical and fundamental analysis about why I think SAM is about to reach new highs this year.
SAM is America's leading brewer of handcrafted, full-flavored beers. It uses the world's finest all natural ingredients. In the last five years, SAM has won a number of major awards. SAM sells their products to a network of around 350 distributors who then sell their products to a number of different entities including pubs, restaurants, groceries and stadiums.
SAM produces and sells their beers in a number of markets, particularly in the U.S, Canada, Europe, the Caribbean, Mexico and Central and South America. The company was founded in 1984. The company began with an old-family recipe that the founder Jim Koch discovered in his father's attic. Jim wanted a complex and full-flavored beer that drinkers would love. The first beer was Samuel Adams Boston Lager which helped to catalyze the American Craft Beer Revolution. SAM employs over 1000 people, Over 300 of these are in sales.
The bullish scenario
The growth rates in craft beer into the next few years look impressive. This segment is expected to grow from $12 billion to $17 billion into 2017.
The growth rates seen by craft beer are impressive, especially during a period when domestic and imported beers have shown a flat to declining performance. Unlike its domestic and imported beer counterparts, craft beer has been able to defy overall beer market trends and continue expansion during the economic downturn and subsequent slow recovery. While the craft and craft-style beer category remains a small segment of the $78 billion US beer industry, the category has been able to stabilize the overall beer industry, which has experienced volume declines in the domestic and imported beer categories since 2008.
On March 18, 2014 craft beer sales numbers in the US came out and this was quite impressive. Craft beer market share rose to an impressive record of 7.8%. By 2020, the American Craft beer Association predicts that this can rise to 20% by 2020!
Considering that SAM is the largest craft brewer in the US, I believe this is a very strong bullish case to be an investor in this company.
Latest earnings call
The recent earnings call was a stellar one and there were a number of statements that caught my eye. A summary is below.
- Net income of $18.1 million or $1.33 per diluted share for the fourth quarter, representing an increase of $1.2 million or $0.08 per diluted share from the same period last year.
- Core shipment volume for the fourth quarter was approximately 941,000 barrels, a 29% increase over the fourth quarter of 2012.
These are all impressive numbers and I continue to believe that huge numbers and increase in guidance will come in the next earnings call at the end of April.
Estimates for 2014 and 2015 have been on the rise as seen below.
(Adapted from finance.yahoo.com)
I like how the daily and the weekly chart are setting up.
If we start with the daily chart, we can see how prices have been stabilizing. There is strong support at the 50 day moving average, the price where institutions usually come in. Stochastics are very oversold at these levels, another indicator I use to initiate positions. Keep an eye on volume, as I expect this to increase into earnings in the next few weeks. I will be adding to my position if prices continue to stabilise around these levels.
(Adapted from stockcharts.com)
The weekly chart is also very strong and a cup and handle has been forming over the last few weeks. Stochastics have come down from the overbought levels formed a few weeks ago, which makes it safe to initiate a position around these levels. There is strong support at the 30 and 40 day moving average on the weekly chart and volume has been decreasing as the handle has been forming, all bullish technical indicators I use on my technical system.
(Adapted from stockcharts.com)
There are a number of factors that I like in SAM. The first thing is that it is only currently valued at around $3 billion. This is very small considering the company will post over $1billion in revenues over the next year. Another factor I like is the small float position in SAM. There is only 8.54 million shares in the float! Over 12% of the float is short. This is a huge number as a short squeeze can cause a huge rally in the price.
The company has around $74 million cash in hand with around $0.6k debt, which reduces the chances of any secondary offering of shares, another bullish case. The company also has $50 million line of credit, which is still unused at this time.
Furthermore, the company has approximately $25.5 million remaining on the $325 million share buyback expenditure limit set by the Board of Directors.
SAM also enjoys very strong margins. Brewing involves simple and cheap ingredients and this enables SAM to achieve growth margins of over 50%.
SAM is capitalized with no bonds, no preferred stock but with common stock, which is divided into dual-class structure. Class A is publicly traded and has no voting rights, whilst Class B is not publicly traded and has full voting rights. Founder Jim Koch owns 32% of the company and 100% of the Class B shares, once again very impressive numbers.
Risk factors and future challenges
SAM has a number of competitors in the craft beer industry. SAM estimates that there are approximately 3,600 breweries in operation or in the planning stages up from approximately 420 operating craft breweries in 2006. The two largest brewers in the United States, Molson Coors Brewing Co (NYSE:TAP) and AB InBev (NYSE:BUD), have entered the Better Beer category with domestic specialty beers, either by developing their own beers, acquiring, in whole or part, existing craft brewers, importing and distributing foreign brewers' brands or increasing their development and marketing efforts on their own domestic specialty beers.
Secondly, the small float in itself can be a risk. There is quite a volatility in daily trading as can be seen on the charts above. The company only trades around 70k shares a day. This is quite low and any news can cause investors to take profits and cause a collapse in the price.
The third and final risk relates to the craft beer industry. The craft beer industry has achieved strong growth in recent years. Some researchers question the growth and whether this can be sustained. Any change in consumer spending could affect SAM's market share and revenues.
Having said all this, I believe SAM is a niche position simply because their beer is best of breed and they are leaders in craft beer. In 2012, SAM hit a new record, taking home more than 360 medals from competitors in the U.S, Australia, New Zealand and the United Kingdom. SAM's brand has the country's largest selling craft beer, and it only accounts 1% of the U.S beer market.
I continue to like SAM at these prices even though investors have been rewarded nicely over the last few years. The small float position, the high percentage of the float being short, the strong earnings and strong technical indicators are all factors why I remain long and will be looking to add again shortly.
Disclosure: I am long SAM. 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.