Why Growth Investors Should Buy Sam Adams

Aug.23.10 | About: Boston Beer (SAM)

The Boston Beer Company (NYSE:SAM) is the largest craft brewer and independently owned brewer in the United States. The company’s flagship beer, Samuel Adams Boston Lager, remains the core brand; however, the company also has a well diversified portfolio that ranges from flavored malt beverages, seasonal beers, to hard cider.

The Boston Beer Company’s goal is to become the leading brewer in the Better Beer Category by creating and offering high quality full-flavored beers. On that note, in fiscal 2009, Boston Beer sold approximately 2 million barrels of its core brands and brewed or packaged approximately 200,000 barrels under contract for third parties. Craft beer brewing has become an established growth industry in the United States and a look at the following net income figures will prove that Boston Beer is a leading craft brewer by profit.

Boston Beer Company net income by fiscal year-end in thousands of USD:

2004

2005

2006

2007

2008

2009

$12,502

$15, 559

$18,192

$22,491

$8,088

$31,118

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The Boston Beer Company does face substantial competition and strong economies of scale created by other major competitors as a result of the recent beer industry consolidation.

Prior to 2007, Boston Beer pursued a balanced strategy of combining brewery ownership with production arrangements at breweries owned by third parties. As the number of available breweries has declined due to the beer industry’s recent consolidation trend, the risks of disruption have increased, and the dynamics of brewing strategies have changed.

Therefore, in 2007 and 2008, due to concerns about expected future availability and pricing of brewing capacity at third-party brewers, Boston Beer initiated several steps designed to reduce its dependence on third-party breweries, including the acquisition of a Pennsylvania Brewery from Diageo North America. According to a company statement,

“We expect to brew over 95% of core product volume in 2010 at company-owned breweries. We believe we could support growth in 2010 in excess of 10% without significant capacity expansion of owned breweries and that further growth could be supported through expanding our use of production arrangements with third parties.”

Although the Boston Beer Company will have higher capital maintenance costs through the acquisition of brewing plants, it makes long-term sense to establish economies of scale through enhanced brewing capacity and distribution superiority. In addition, the company has no long-term debt and no borrowings were outstanding under their credit facility at fiscal year-end 2009 and 2008.

Moreover, James Koch, Chairman of the Board, founded the company in 1984 and his 25 years at the helm of the company are a key intangible asset that has driven what was once a small start-up company into a present industry leader and long-term success story. Boston Beer Company is definitely a buy for the long-run investor.

Disclosure: The author has no positions in SAM at the time of writing