Shares of Boston Beer Company Inc (NYSE:SAM) closed down 13.6% on Thursday, after the company’s fourth quarter release Wednesday evening. Truthfully, it might get worse for Boston Beer stock.
It’s not that fourth-quarter earnings were particularly bad — they weren’t. In fact, the numbers were in line with expectations. 2018 guidance does look reasonably weak, however.
And the problems with SAM stock go beyond a single earnings report. The SAM stock price simply looked far too high heading into the report, thanks to a 50% run-up since July. Those gains priced in growth that Boston Beer simply isn’t capable of creating.
Thursday’s losses extend a pullback from a 23-month high that reached just over $200. And, from here, they look like just the start. Unless something changes quickly, and noticeably, Boston Beer stock should have more downside ahead.
As noted, Boston Beer’s Q4 numbers were about in line with expectations. Revenue declined 5.9%, matching Street estimates. GAAP earnings per share came in at $2.57. Excluding a one-time $1.72 per share benefit from tax reform, EPS of 85 cents beat consensus estimates by six cents and rose almost 4%.
The rise in EPS was largely due to share repurchases, however, and the quarter capped off a disappointing year. For the full year, depletions — sales by wholesalers to retailers and bars — declined 7%. One less week this year had an impact, but most of the weakness came from lower sales of both Samuel Adams and Angry Orchard cider. Excluding the tax benefit, EPS fell 6.2%.
The company expects 2018 to be better — but guidance was below Street estimates. Boston Beer projects 2018 EPS between $6.30 and $7.30, against a consensus of $7.25. A guided effective tax rate of 28% is higher than most expected, given tax reform. Depletions are guided positive at least, in a range of flat to positive 6%. But at the current SAM stock price, that’s not close to good enough.
The Craft Beer Market Looks Full
The problem is that Boston Beer stock still is priced for reasonably substantial growth. At $178/share, SAM trades at over 26 times the midpoint of 2018 guidance — even though that midpoint implies just 6.8% year-over-year increase, with most of the growth coming from a lower tax rate.
But there’s a very real chance that Boston Beer’s growth is over — for good. The explosion of craft beer options over the past few years has dramatically changed the industry. Smaller peer Craft Brew Alliance Inc (NASDAQ:BREW) actually pulled its Redhook and Widmer Brothers out of most of their markets.
The so-called “retrenchment” came in response to the fact that being a craft beer wasn’t good enough. Savvy beer customers now want locally brewed craft. And with over 5,000 breweries nationally, they can get it.
The Response From SAM
There’s not much Sam Adams can do about that shift. The long-awaited addition of a New England IPA might help. The company believes its Sam Adams ’76 — a combination ale and lager — will drive sales next year, with the possibility of a hit along the lines of Corona, from Constellation Brands, Inc. (NYSE:STZ).
But the market looks simply too saturated. Sam Adams is losing tap space to other beers. It’s losing shelf space to other retailers. Adding to the potential pressure, fears persist of a price war in craft brewing amid industry saturation. On the Q4 conference call, SAM founder Jim Koch pointed out a move to 15-packs instead of 12-packs as a form of pricing pressure. (Craft Brew Alliance management has pointed out the same trend.) While that’s not lower pricing per se, the ability to get 25% more beer from a rival adds one more competitive threat.
Outside of Sam Adams, the portfolio isn’t strong enough to drive growth. Angry Orchard cider already is seeing declining depletions. That product was launched just six years ago. Twisted Tea and Truly Spiked & Sparkling grew in 2017 — but not enough to offset falling sales elsewhere.
All told, this looks like a business in line for relatively little growth going forward. And if the craft beer space goes into freefall, with desperate brewers slashing prices, EPS declines are not out of the realm of possibility.
Boston Beer Stock Is Too Expensive
To be sure, SAM earnings can move quite a bit on small moves in revenue. Incremental margins are high; it doesn’t cost Boston Beer much to make one more keg or one more 12-pack. That fact is evidenced in the relative wide guidance range for 2018.
But 26x EPS is a big multiple, even in a relatively expensive beverage space. I’d rather own SAM than The Coca-Cola Co (NYSE:KO) at 23x EPS — but I think KO stock is highly overvalued. STZ trades at 22x — with a better, more diversified, portfolio. Earlier this month, Bret Kenwell made the case for Molson Coors Brewing Co (NYSE:TAP), which has growth challenges of its own, but trades at just 15x forward EPS. Beer giant Anheuser Busch InBev NV (ADR) (NYSE:BUD) trades at around 21x.
The SAM stock price suggests Sam Adams will outgrow those companies — sharply. But that’s not what happened in Q4 or full-year 2017. It’s not what’s likely to happen in 2018, either.
If that growth doesn’t come, Boston Beer stock has a long way to fall.
As of this writing, Vince Martin has no positions in any securities mentioned.