If there’s one thing I’ve loved to grouse about since moving to the East Coast, it’s beer prices. When you come from Ohio — near good ol’ volume-drinking capital Ohio State, no less — drinkers are spoiled absolutely rotten with low-priced booze. You head a few hundred miles toward the Atlantic, though, and things start to get ugly.
So, imagine my delight when one of my favorite craft beer names recently cut its price.
That’s right. After reporting second-quarter earnings Wednesday night that didn’t have quite the foamy head Wall Street expected, Boston Beer Co. (NYSE:SAM), maker of the “large-craft” Sam Adams line, took a roughly 8% hit Thursday morning.
For about five minutes, anyway.
By Thursday’s end, SAM actually had climbed roughly 2.5%. And that 10-percentage-point swing from deep red to solid black should be all you need to know about how resilient investor confidence is in Boston Beer.
Beer is going in two directions. Headed one way, you’ve got Budweiser-hocking Anheuser-Busch InBev (NYSE:BUD) and Miller-shilling SABMiller (PINK:SBMRY) trying to conquer the world with volume. Almost embarrassingly so. Earlier this year, SABMiller unveiled pop-top cans for Miller Lite. Translation? “Our product tastes bad. We won’t fix it. We’ll just have you drink it quicker.”
In the other direction, you have craft beer. People tired of chugging mass-produced pisswater have toiled to create their own complex, inspired drinks, sparking an industry of more than 2,000 breweries across the U.S. alone, and a market whose American sales jumped 15% in 2011.
At the front of the class? Boston Beer and Sam Adams. SAM is the No. 1 craft beer company in America, tied with Pennsylvania-based Yuengling for the title of top American-owned brewer based on 2011 sales.
In addition to its main label Boston Lager, Sam Adams has a lineup of other varied brews numbering in the 20s — everything from India pale ales, porters and pilsners to Sam’s own ridiculously high-powered Utopia.
While that size and breadth actually has made some snootier aficianados turn their noses at Sam Adams, make no mistake — Boston Beer is about quality. For instance, Sam Adams Noble Pils recently earned the No. 13 spot on Men’s Journal’s 25 Best Beers in the World. The commentary:
“It’s not just a commercial: Brewmaster Jim Koch actually does visit Germany’s Stanglmaier Farm every year to check on his crop of “noble” hops — the five most esteemed strains of the approximately 100 hop species. All five go into this crisp, slightly bitter German-style pilsner — the most delicious new beer to come out of the now-venerable Boston Beer Company in years.”
All that is promising. So … what spooked investors early Thursday?
SAM hit a bit of a stumbling block. Second-quarter earnings dropped nearly in half from the previous year — though 2011’s numbers were boosted by a glass recall settlement, and 2012 numbers were weighed down by Boston Beer’s “Freshest Beer” program aimed at ensuring optimum freshness on delivery.
Still, backing out the costs, EPS of $1.19 weren’t up to snuff with estimates of about $1.23. Also, operating expenses nearly doubled, and ad spend increased. Those headline numbers easily would send some knee-jerk investors packing.
But if you drank in the rest of the report, there was plenty of good news. Revenues were up about 10% to $147.5 million — though still short of expectations — and barrels sold climbed to nearly 700,000. The company also reaffirmed guidance of $3.80 to $4.20 per share, with the Street expecting SAM to hit the high end.
Considering SAM already had been in a funk since early June that had erased almost all of 2012’s gains (about 17% at that point), Thursday’s quick beating gave other investors the chance to get in on the cheap.
And “cheap” is a term rarely used with Boston Beer. Sam Adams isn’t expensive, but it’s not inexpensive, either. And SAM stock itself has traded with a lofty valuation (currently in the mid-20s) for some time.
But this is a stock that has gained nearly 500% since the market got shelled in 2008-09 and returned almost 60% in the past two years. If earnings growth stays on target, SAM would be poised to gain another 20% in the next year — and oh, the potential if the U.S. economy could get into gear.
So on its own, Boston Beer still looks tasty. But I’d be remiss not to point out one last thing: the buyout wild card.
Will Ashworth briefly discussed the prospects in late 2011. CEO Jim Koch owns 33% of the company, and he’s in his early 60s. He might not sell now, but that time is coming, and when it does, there’ll be demand.
Anheuser-Busch InBev and SABMiller can bang their heads up against the cheap-beer wall for eternity, but a chance at picking up the biggest name in craft brew would be irresistible. And doable. Boston Beer currently has a market cap of about $1.4 billion. Even at a 25% premium, you’re looking at buying SAM for roughly $1.8 billion. That’s not even half of BUD’s $3.7 billion stash.
Like I said, though, that’s a wild card. Don’t buy SAM for the buyout potential — buy it for the pure potential. The U.S. beer-drinking tide is turning toward quality over quantity, Boston Beer makes up just 1% of the American beer market and SAM totes a better product than its bigger competitors. That’s a pretty good position to be in.