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Stock Analyst Update

Boston Beer Looks Frothy

The softening hard cider category and continued competition in the maturing craft beer market will constrain longer term volume growth.

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Narrow-moat  Boston Beer (SAM) reported fiscal 2017 results that were largely in line with our expectations, with a revenue decline of 4.8% (versus our expectation of 4.6%) and operating margin of 13.4% (20 basis points below our outlook and 180 basis points below fiscal 2016). We don’t anticipate material revisions to our medium-term outlook, which incorporates mid-single-digit sales growth and midteens average operating margin over the next three years. We plan to raise our $164 fair value estimate by a mid-single-digit percentage to account for the time value of money and a slightly more optimistic near-term gross margin forecast, but we continue to think investors should wait for a more attractive entry point.

Depletions for the quarter fell 2% over last year (based on comparable 13-week periods), as Boston Beer’s core Samuel Adams and Angry Orchard brands continue to face headwinds, but reflect a more positive trend than seen in previous quarters (comparable depletions declined 3.5% in the third quarter). This supports our contention that the firm’s investments in advertising and promotion--which totaled nearly 15% of sales for the year, an uptick of 320 basis points over the year prior--stand to improve the trajectory of its volume and enhance the brand intangible assets that underpin its competitive edge. However, we remain wary of the softening hard cider category, which management estimates to have declined 6% in 2017 (on top of declines in the year prior), and continued competition in the maturing craft beer market, which management estimates grew 5% in 2017, versus a double-digit clip between 2010 and 2015. This bolsters our view that the firm’s longer-term volume growth will be constrained to the low single digits.

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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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