Sam Adams Still Faces Stiff Competition

| About: Boston Beer (SAM)

Summary

The decline in the stock price is justified.

Sam Adams is having difficulty maintaining customer loyalty.

SAM has had limited success with specialty beers and Twisted Tea brand.

The competitive risks outweigh potential upside at these levels.

Stock Decline Justified

Boston Beer Company (NYSE:SAM), known for its brand Sam Adams, is the second largest craft beer company in the US, but has been struggling for growth in a market that is becoming increasingly overcrowded by smaller brewers. It's been rough for investors. In Jan 2015 SAM reached an all-time high of $315 per share. Since then the stock has justifiably fallen by more than 50% to its current price of $156 per share. In their 2014 fiscal year they achieved an impressive growth of more than 20%. Investors expected similar growth in the future and for Boston Beer Company to be leading the industry in growth. This led to the stock's valuation to foam up to PE ratios of 35-40. However, it soon became more apparent that SAM was grossly overvalued as its growth rate quickly decelerated and even went in the red this year. Just as with a bad pour, the foam started to fizzle down and investors realized there wasn't nearly as much beer in the glass as they thought.

Difficulty in Building Customer Loyalty

In their most recent quarter SAM actually reported a year over year revenue decrease of 5%. Jim Koch, Founder and Chairman of the company, blamed the decrease on "increased competition and continued growth of the drinker interest in trying new styles." Jim Koch's statement summarizes the primary challenge the company faces. The primary consumers within the craft beer industry are open minded, experimental drinkers who prefer buying beers from microbreweries than from corporate beer companies, even if that company pales in comparison with the large "American Lager" beer companies.

Boston Beer Company's flag ship the Boston Lager is losing its craft status. While it is still considered craft beer by the Brewer's Association, it rarely comes to mind when talking to craft beer enthusiasts. The availability of its microbrew, and regional craft breweries have grown tremendously and continue expand to more bars, pubs, and grocery stores. The more competitive, and higher quality craft beer market has, from the consumer's perspective placed Sam Adam's Boston Lager in medium tier category, not quite as good as the local micro-brews but still much better than the factory made Bud-Lites. In this market it is difficult to maintain brand loyalty with a perceived medium tier beer, when there are more than 4200 smaller breweries producing similar to higher quality beer.

Limited Success

Things do not look entirely bleak for the Boston Brewery. In keeping with Jim Koch's business philosophy, they are constantly experimenting with different recipes and rolling out different styles of beer. They have eight different seasonal beers, available during certain times of the year. Along with their "Rebel IPA" family and "Nitro Project" they also offer a long list of limited released beers and collections which have been well received, and have enjoyed some success. In addition to its beer sales, Boston Beer Company also owns Angry Orchard Hard Cider and Twisted Tea. Both have catered to drinkers looking to try new tastes. While Twisted Tea has had some success Angry Orchard have declined over the past year. Overall the limited success of Twisted Tea and some of Sam Adam's specialty beers have not been enough to offset the decreased sales of their Boston Lager.

Valuation Is Still Too High

At the time of writing this article SAM is trading at $157.44 per share, trading around 22 times 2017 earnings estimates.

At first glance, when compared to the large beer companies Coors (NYSE:TAP) and Anheuser-Busch (NYSE:BUD) SAM may look fairly valued. However, while all three companies may be selling beer, they cater to different segments of the market.

2017 PE Ratio

Est. 5y Growth

SAM

22.3

12%

TAP

19.5

3.20%

BUD

24.3

6.90%

S&P

17.4

Click to enlarge

TAP and BUD target the lower tier beer market dominated by a handful of companies. SAM has to compete with a multitude of microbreweries and regional breweries in the medium and upper tier beer market. Due to this competitive market, the risk of further loss in revenue is greater than the potential upside. It is because of this downward risk that makes me inclined to believe SAM is slightly overvalued. They have yet to prove whether or not they can withstand the influx of microbreweries popping up everywhere.

2016

2017

Revenue (Mil)

940

965

Rev Growth

-2.1%

2.70%

EPS

6.46

6.94

EPS Growth

10.9%

7.4%

P/E Ratio

23.96

22.30

Click to enlarge

Currently analysts expect Boston Beer Company to grow revenue by 2.7%, however this still might be a little too optimistic. Given competitive pressure I expect Revenue to be flat to slightly negative for next year. Having flat to slightly negative growth can disproportionately affect their earnings and their stock price.

2017 Revenue Growth

Revenue (Mil)

Net Income (Mil)

EPS

Price

P/E Ratio

-3%

911.80

69.81

$ 5.40

$ 97.25

18

-2%

921.20

72.88

$ 5.64

$ 107.16

19

-1%

930.60

75.95

$ 5.88

$ 117.55

20

0%

940.00

79.02

$ 6.11

$ 128.41

21

1%

949.40

82.08

$ 6.35

$ 139.75

22

2%

958.80

85.15

$ 6.59

$ 151.56

23

3%

968.20

88.22

$ 6.83

$ 163.85

24

Click to enlarge

Conclusion

The future of the Boston Brewery looks pretty uncertain. The market in the US is becoming increasingly competitive and saturated with microbreweries popping up everywhere. While Sam Adams will always have a core group of drinkers whose go-to-beer is their Boston Lager, domestic growth for the company looks flat to low single digits in the medium-term. After the market closes on Thursday, they will report their 3rd quarter earnings for this fiscal year, giving us a better sense of how they are handling competition, and how it will affect their earnings going forward. However, leading into earnings I would not want to own SAM stock earnings at current valuations.

Disclosure: I/we 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.