Here's Why Boston Beer Stands Out From Alcohol-Beverage Peers
Zacks Investment Research | Jun 17, 2019 07:50AM ET
The Boston Beer Company Inc. (NYSE:SAM) stock has been resilient in a tough industry, owing to its robust quarterly performances, driven by consistent momentum in shipment volume and depletions. Moreover, a vast non-beer portfolio — including the Twisted Tea, Truly Spiked & Sparkling, and Angry Orchard brands — places it well for growth in an industry where beer trends have slowed due to change in consumer preference.
The company reported impressive first-quarter 2019 results, wherein earnings outpaced estimates while sales were in line. This marked its third straight earnings beat. Solid shipment growth due to the company’s efforts to ensure that distributors’ inventory levels were appropriate to cater to increased customer demand during the peak summer months mainly boosted results. Further, strong depletions growth, supported by strength in Truly Hard Seltzer and Twisted Tea brands, aided top and bottom-line performances.
These positives have aided the stock to outperform the industry year to date. This Zacks Rank #3 (Hold) stock has surged 40.8% year to date, outpacing the the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
Looking more closely at stocks in the broader industry, we note that Boston Beer also outpaced its peers. Notably, the Molson Coors Brewing Company (NYSE:TAP) has witnessed a decline of 3.8% in the year-to-date period while Constellation Brands (NYSE:STZ) and Anheuser-Busch InBev SA/NV (NYSE:BUD) gained 16.7% and 28%, respectively.
Let’s delve deeper and find out reasons that are placing Boston Beer ahead of its peers.
Factors Aiding Stock Growth
Boston Beer’s focus on the three-point growth plan, including cost savings, long-term innovation and the revival of Samuel Adams and Angry Orchard brands, is the key to its growth strategy. These efforts have been contributing to the company’s sturdy depletion and shipment growth, which have been aiding its performance.
Driven by these positive trends, management raised shipment and depletion guidance for 2019. The revised guidance was primarily due to robust trends witnessed for the truly brand in the first quarter, which aided depletions growth. The company now estimates depletion and shipment growth of 10-15% in 2019, up from previously mentioned 8-13%.
Boston Beer’s three-point growth plan is on track with efforts to revive the Samuel Adams brand through packaging, innovation, promotion and brand communication initiatives. Further, it targets retaining Angry Orchard and Twisted Tea’s momentum while ensuring Truly Spiked & Sparkling's leadership position in the hard sparkling-water category.
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The company also focuses on accelerated cost savings and efficiency projects, with savings directed for further brand development. As a result, it continues to anticipate improving gross margin by one percentage point every year through 2019. Its third priority is long-term innovation and maximizing the shareholder value. Boston Beer remains optimistic about the future of craft beer and cider categories.
Notably, the company is the largest premium craft brewer in the United States and has strong portfolio of globally recognized brands. Apart from selling alcoholic beverages in the United States, it distributes beverages in Canada, Europe, Israel, the Caribbean, the Pacific Rim, Mexico, and Central and South America through strong network of wholesale distributors. We expect the company’s continued focus on pricing, product innovation, and growth of non-beer categories alongside brand development to boost its operational performance and position in the market.
The company’s innovation in the non-beer categories, including hard teas, ciders and seltzer, has been a hit among liquor drinkers, which should drive depletion growth. It is on track to launch three new brands in 2019 namely, 26.2 Brew, Wild Leaf Hard Tea and Tura Alcoholic Kombucha that address health and wellness of consumers.
Wrapping Up
Though the aforementioned factors keep us optimistic about the stock’s future potential, there remain some hurdles in its growth path. The most prominent among these is the persistent softness in the Samuel Adams brand as well as higher packaging and transportation costs.
Despite gains from cost-saving initiatives, Boston Beer’s gross margin remains soft due to higher processing costs — stemming from increased production at third-party breweries, higher temporary labor at company-owned breweries and escalated packaging costs. Further, the company notes that increased volumes for the brands are attracting higher costs due to the use of third-party breweries, which are likely to hurt the gross margin in 2019. Consequently, it now anticipates gross margin of 50-52%, marking a decline from the previously stated 51-53%.
Additionally, volume growth for Boston Beer’s Samuel Adams brand has been a key headwind, which is weighing on the overall volume and depletion growth as well as the top line. The brand is struggling from the industry-wide softening of the craft beer growth rates and increased choices for drinkers on retail shelves. Though the company is progressing well with plans for revival, we believe that there is a lot of work to be done before seeing a turnaround in the trends for this troubled brand.
Nonetheless, we believe that there is still momentum left in the stock of this leading craft brewer as it has a long-term impressive earnings growth rate of 10% and a Zacks Investment Research
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