Was Boston Beer's Share Rally From Whiskey Deal Warranted?

Jun.20.12 | About: Boston Beer (SAM)

Shares of Boston Beer (NYSE:SAM) hit a new all-time high during Tuesday's trading session. The move was fueled by the announcement of Samuel Adams branded whiskey in new blends. Shares briefly traded at $120 a share before closing at $116.05.

The new whiskey announcement is a partnership between Boston Beer and Berkshire Mountain Distillers. Formed in 2007, Massachusetts based Berkshire Mountain Distillers makes its own gin, vodka, rum, whiskey, and bourbon. The craft brewer is now utilizing two Samuel Adams beer brands to create new blends of whiskey. Samuel Adams Boston Lager and Cinder Bock will be used as the base for two unique whiskey blends offered by Berkshire Mountain Distillers.

The newly created whiskey blends will not be available until 2015. The whiskeys will start with an initial batch of 12,000 bottles. The bottles will sell for a retail price of $40. Berkshire Mountain Distillers sells its products in 19 states, but I expect that number to increase by the time the new whiskeys are released.

Investors missed the fact that the new whiskey's profits will go to Berkshire Mountain Distillers, rather than Boston Beer. Samuel Adams will be used as a base and a name on the bottles and generate no money for the Boston Beer company. The deal could lead to future earnings in the spirits market for Boston Beer.

Boston Beer is a great company on its own, but yesterday's market reaction makes the shares expensive. Shares of Boston Beer now trade for 28 times this year's earnings and 24 times next year's expected earnings. The company has beat analysts' earnings estimates each of the last three quarters. These estimates are from Yahoo Finance calling for $4.20 per share in 2012. Boston Beer has forecasted $3.80 and $4.20 so the earnings could disappoint Wall Street.

Boston Beer reports earnings on July 31st and analysts are expecting $1.25 per share. I think that investors would be wise to wait for shares to drop or keep that day circled for a potential buying opportunity depending on earnings. Boston Beer has over 1% of the overall United States beer market. The company continues to face competition from craft brewers around the nation at a growing rate.

Boston Beer also faces competition from large beer companies that are expanding their portfolios to cater to craft brewed beer consumers. Investors looking to add a "Sin Stock" to their portfolio may do better with a company that pays a dividend or trades at a cheaper valuation.

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