Boston Beer Still Looks Expensive

Sonia Vora: Shares of Boston Beer have soared since the beginning of the year, as improving depletion trends have bolstered confidence about the firm's top-line prospects. However, we think the market is overly optimistic about the company's prospects in a slowing craft beer market and suggest investors wait for a more attractive entry point.

While we expect ongoing premiumization trends will help craft beer volumes outpace the overall beer category longer term, we see evidence to suggest that craft momentum is slowing. We estimate volume growth in the craft segment, which now holds a nearly 13% share of domestic beer volume, fell to a midsingle-digit clip in 2016 and 2017. While this pales in comparison to the roughly 15% rate averaged over the prior five years, it is still more favorable than the roughly flat overall beer market.

We expect competition within this slowing category to remain intense, as both the largest beer players and small craft producers aim to drive volume gains in the high end of the beer market. This should constrain Boston Beer's top line to midsingle-digit growth longer term, which is in line with our outlook for the broader craft beer category.

However, we maintain Boston Beer has secured a competitive edge, thanks to its flagship Sam Adams brand and entrenched relationships with retailers and wholesalers. We think the firm will be able to leverage these relationships to support a positive growth trajectory, despite further SKU rationalization in the beer aisle.

Boston Beer's efforts to trim costs from its operations should also strengthen its bottom line, ensuring it has the resources needed to reinforce its brand investments and maintain a solid pipeline of innovation, which we view as essential to support its volume recovery.