Boston Beer: Flavor And Growth Make For A Winning Investment

| About: Boston Beer (SAM)

During a recent vacation, I had a chance to take a tour of the Sam Adams Brewery in Boston, Massachusetts. Sam Adams is the flagship beer of the Boston Beer Company (SAM), and has been around for quite some time. The Boston Brewery is not a full scale, large brewery, but they do produce some quantities of beer. On the tour, you learn how beer is made, what hops are, and if you are over 21, you get a free 7oz beer glass and can sample three of their beers. Why do I tell this story? Well, I've tried their beers in the past and they are quite good, so I decided to do some fundamental research on the company. For those looking for a good long term play in the industry, Boston Beer Company is a great stock to invest in.

The company has done well in recent years, as their growth on both the top line and bottom line are strong. As you can see in the following table, revenues (in millions) are expected to be up about 8% this year and even more next year.

Growth 2008 2009 2010 2011* 2012*
Revenues $398.40 $415.05 $463.80 $501.78 $551.98
EPS $0.56 $2.17 $3.52 $3.70 $4.13
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Margins 2008 2009 2010
Gross Margin 46.16% 51.52% 55.27%
Operating Margin 3.53% 13.08% 17.50%
Profit Margin 2.03% 7.50% 10.81%
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The company has improved on its margins quite well coming out of the recession, and these numbers are expected to improve even more. While the gross margin projections of 54% to 56% this year don't seem like they may be up from last year's 55.27%, I must show you that in the first nine months of this year, all three margins are higher than last year's first three quarters. In fact, operating and profit margins are substantially higher than a year ago. Profit margins will be even better in the fourth quarter as the company is expecting a lower tax rate due to a one time gain. The company has done quite well over the past few years, as you can see the huge growth in operating and profit margins since 2008. Even if the company only does 20.5% on the operating margin and 12.5% on profit margins for the year (which are extremely conservative estimates), they will have seen nice improvement over 2010 numbers.

Margins (9-mo) 2010 2011
Gross Margin 54.58% 55.12%
Operating Margin 17.90% 21.01%
Profit Margin 10.91% 13.01%
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But what makes this a good long term play is its position in the industry. Samuel Adams is a craft beer. What does that mean? Well, it means that the company is focused on quality, not quantity. The company says you should "take pride in your beer", a phrase that has won them numerous awards over the years. The company wants to have the best tasting beer, and is not in the game of selling mass numbers at lower prices like an Anheuser Busch Inbev (BUD) or Molson Coors (TAP).

While they are focused on selling their product, they'd rather you have a good tasting beer than spend less just to get a case of a watered down, no flavor beer. In fact, the company has a variety of higher priced specialty beers. For instance, they have the Imperial Series and a few others that retail for about $6 for a 22oz. Yes, I said 22 ounces. A lot of other brewers give you a six pack for that price. The company has even gone out on a limb, every two years, with their Utopias. This beer is in a 750ml container, and costs $150. Why is it so expensive? Well, this extremely limited edition "beer", is more like a cognac, and has a ABV of 24% to 28%, depending on the year and batch. Again, they want you to savor your beer, not just consume mass quantities (although that would help their revenues).

So why do things look upward from here? Well, for starters, they are debt free. They have an extremely clean balance sheet and like I said above, margins are improving constantly. But the second reason is their potential for room to grow. Just take a look at this year and the next.

Growth Potential SAM TAP BUD
2011 Revenues 8.20% 7.60% 8.10%
2012 Revenues 10.00% 1.30% 5.10%
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With revenues of only half a billion, they can grow at double digits each year going forward easily. The big names cannot do that. Sam Adams will grow faster, meaning they will take market share away from the big boys. They already are. Just look at their percentage of market share, and when I say market share, I'm only comparing the revenues of these three names. You must remember that there are plenty of other beer companies out there, too many to mention.

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Year 2009 2010 2011 2012
Share 1.03% 1.16% 1.16% 1.22%
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Now, a 19 basis point increase might not seem like much, but in percentage terms, that's quite a lot. If Boston Beer can grow revenues at 10% a year, and the other two names only grow at 5%, that "market share" number will grow to 1.40% by 2016. That would be quite an improvement in such an extremely competitive industry. Finally, let's look at a couple valuation metrics (trailing twelve months for revenues and net income).

Valuations SAM* TAP BUD
Market Cap. $1.33B $7.72B $92.4B
Revenues $487M $3.41B $92.6B
Net Income $60M $613M $4.97B
P/E (trailing) 30.04 13.08 18.79
P/E (forward) 24.95 11.68 13.67
P/S (trailing) 2.72 2.23 2.40
P/S (forward) 2.41 2.17 2.24
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*EPS trailing excludes one-time settlement gain.

As you can see from the table, Boston Beer is a little expensive when compared to its industry, but I think that's fine. They are growing faster than the competition, and are smaller, so you would expect a higher P/E. I like to focus more on the price to sales number for them, which is a lot closer to the two competitors, especially when looking at the forward price to sales. The valuation may seem a little inflated at the moment, but that's only because the stock has done extremely well lately. It had a great earnings report and has held up quite well, even when we have big down days in the market. Over the past three months, Boston Beer is up about 31%, while Molson Coors is up about 12% and AB Inbev is flat. If you want to wait for a pullback, that's fine, you can probably get it under $100 the next time we have a decent market decline. Either way, this stock is priced for the long haul, and I think it's a great company to buy into right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.