Boston Beer Looks Frothy
The softening hard cider category and continued competition in the maturing craft beer market will constrain longer term volume growth.
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.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.