Summary
- Boston Beer Company is up about 20% since its 2nd quarter earnings report on the 23rd of July. The stock has more than doubled YTD.
- SAM continues to demonstrate an uncanny marketing ability to not only be in the right place at the right time with product lines that dovetail with market momentum.
- With the stock fast closing in on $900/share, a $1,000/share end-of-year share price is a reasonable assumption.
Boston Beer Company (SAM) is on a market tear of late, outpacing its 200-day trading average (blue line) by a substantial margin. The company’s CAGR since December 2010 clocks in at an impressive 10.42%. Gross profit annualizes out at a robust 9.17% while its operating income for the period comes to 8.8%. The added splash comes from the company’s market performance YTD which hovers in the neighborhood of 133% YTD, about 20 times that of the S&P benchmark and the otherwise staid SPDR Consumer Staples ETF (XLP) (purple line). The negative return of the Russell 2000 (IWM) (orange line) only solidifies a market surge that appears, at this juncture at least, to be far from long in the tooth (see Figure 1, below).
Some of this annualized growth is a result of the Tax Cuts and Jobs Act of December 2017 where the company saw its average tax rate fall from 37.16% from December 2010 through December 2016 to an average of 19.6% through the end of December 2019. In part, the tax savings enabled the company to re-enter the M&A market in 2019 with the strategic purchase of Delaware-based Dogfish Head, adding a portfolio of branded craft beers to its portfolio. Another causal refrain stems from the company’s uncanny ability to reap economic rent on the growth plays of high demand products brought to market at precisely the right time. Hard cider, craft beers and now hard seltzer are prime examples of such marketing feats.
Figure 1: Boston Beer Company against the S&P 500
SAM runs in an exclusive crowd of US-based craft brewers that at last count numbered over 8,200 through the end of June, according to the Brewers Association. The company’s portfolio includes hard ciders and seltzers, twisted teas and lemonade, its namesake craft beer, Sam Adams and the Dogfish Head portfolio of artisan beers. With the level of fragmentation in the craft brewing space and US regulatory restrictions that separate brewer from distributor, breadth and scale quickly become a decided and secular advantage that the company has effectively deployed with aplomb.
The company’s product portfolio offers up outsized market performers, such as Truly hard seltzer, with low alcoholic, caloric and sugar content that continues to command outsized attention from a health-conscious millennial clientele that conveniently splits almost evenly across genders. With category leader, closely-held, Chicago-based White Claw and Boston Beer’s Truly brand, the two market offerings garnered 80% of a $1.2 billion hard seltzer market in 2019, about 2.6% of the overall alcohol beverage market - up from 0.85% YoY. That market doubles to $2.5 billion in projections through the end of 2021.
The company’s Angry Orchard hard cider has dominated the category since 2013 with over 50% of the market, an earnings stream that accounts for about 20% of the company’s total revenue. And Sam Adams, first launched in 1984, continues to be one of the best-positioned craft beers in the country. Adding measurably to that mantle, recently acquired Dogfish Head portfolio has already added about 4% to the company’s total revenues through the end of the 2nd quarter. Importantly, the purchase further embeds the company in the craft beer space. Demand for full-bodied taste gained through experimentation with hops varieties, brewing techniques for its craft beer offerings, and exotic fruit flavors for its seltzer, tea, lemonade and cider brands provides the gist for forward company growth in the intermediate term.
