In The Spotlight - Boston Beer has fresh ideas, but stock goes stale
Boston Beer serves up strong sales, profits rises.
Investors may have experienced a sobering epiphany on Boston Beer Co's true place in the beer industry pecking order, but the company itself is still looking good.
Boston Beer has spearheaded the craft beer revolution in the US, growing so big that it almost forfeited its right to be called a genuine craft brewer. Some would still maintain that it is no such thing, but, for investors, the magnetic pull of Boston Beer's strong position in just about the only healthy corner of the US beer market has proved too strong to resist.
This week, Boston Beer's magnetic field suffered a power failure. Its share price fell by 11% following its full-year results announcement and has continued to lose ground since, despite a 38% increase in net profits and a 12% rise in net sales.
"We think the 11% decline in after-market trading confirms our belief that the stock has been overvalued for some time," said Morningstar analyst Philip Gorham. "Although we continue to admire the strength of the Sam Adams brand, we recommend investors look elsewhere for value in the brewing industry," he said.
Teresa Rivas, writing on Barron's, followed a similar line. "The stock seems overvalued at this point," she said, "especially given that rivals like Molson Coors Brewing and Anheuser-Busch InBev trade more cheaply, while also dominating the US market with more than 80% of sales."
These are important points, reflecting that Boston Beer's share price has risen by 72% in the last year alone, far outpacing the Dow Jones and S&P 500 on the New York Stock Exchange. In addition, when you consider that Boston Beer constitutes only around 1% of US beer volumes, it appears short-sighted that its share value can be so far up on a business like Molson Coors.
That said, Boston Beer is unlikely to be mopping its brow too much. Its founder and chairman, Jim Koch, has little time for the quarterly results circus. As he put it last year: "We don't necessarily worry about quarter-to-quarter results, because nobody can fire me. I'm not going away."
It's not that the group doesn't care about shareholders - in 2010, it bought back 1.1m shares for US$68m - it's just that it is taking a longer view. In 2011, the Samuel Adams brewer has been open about its intention to "sacrifice" some profits momentum in order to expand distribution and launch its 'Freshest Beer Program'.
The scheme, which is expected to encompass 50% of group volumes in 2011, is intended to reduce the time-lag between beer leaving the brewery and reaching consumers' hands. While it is likely to dent profits initially, primarily because it will reduce volumes, Morningstar's Gorham believes that, "in the long term, ... this will ensure that mainstream brands, for whom freshness is a unique selling point because of their distribution velocity, do not gain a competitive advantage over Samuel Adams."
Boston Beer said that the scheme will "significantly improve" quality and will lead to efficiency savings in the supply chain.
Investors may have temporarily lost their thirst, but Boston Beer is clearly not resting on its laurels.
A ruling on Kronenbourg 1664 by the UK's advertising watchdog has the potential to set a precedent for marketeers of home-brewed 'foreign' beers....
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