How big can a craft brewer get and still be considered a craft brewer?
Not too big. Boston Beer Company Inc (NYSE:SAM), the makers of Sam Adams beer, reports earnings after the market close on Apr. 25, expecting a profit of 38 cents per share on sales of $172.14 million.
That’s a modest target, just $10 million over last year with a slight drop in earnings. But the company, founded by brewer Jim Koch in 1984, has always been modest. Modesty is a key to success in the craft beer business.
Modesty has been working well for Koch, whose shares are up 17% so far in 2018, while the Dow Jones is flat, and big rival Anheuser Busch Inbev NV (ADR) (NYSE:BUD) is down nearly 10%.
The question now becomes, can Koch’s management team justify that confidence? Maybe, but it’s not going to be with beer.
It’s a Cider Company
The growth story for Boston Beer Company is about making more just beer, which it does from a factory in Cincinnati.
Just as Starbucks Corporation (NASDAQ:SBUX) now offers giant “Roastery” stores to make coffee more of an experience, SAM has also started building big taprooms, starting next to the Cincinnati factory and coming soon to its Boston headquarters.
But this is not only a beer story.
If you’ve seen a Boston Beer Company ad lately, it’s probably for its hard cider, called Angry Orchard. The company also offers an alcoholic tea, called Twisted Tea. There’s even a spiked sparkling water called Truly.
The company now has 35 non-beer brands, to go with 60 Sam Adams labels and 50 other beer brands sold through its A&S Brewing incubator. If you’ve enjoyed an Angel City beer in Los Angeles’ craft arts district, it’s owned by Boston.
By getting into these markets early, using its existing Sam Adams distribution network, Boston Beer Company has carved out a big market share, so much so that beer now represents less than 50% of sales. It’s this innovative product strategy (the company is coming out with a rose cider) that has investors interested.
Growth Lacking for Boston Beer Company
The problem is that optimism over these new products may have already driven the stock higher than it should go, at least until it proves it can show real growth with the new strategy.
As a beer company, Boston Beer is just suds. Its total sales have been falling, from $959 million in 2015 to $863 million for all of 2017. While good management has kept net income level, operating income has also been declining, from $156 million in 2015 to $116 million last year.
The company managed to beat expectations handily during the second and third quarters last year, which is peak beer-drinking season, and to hold the line against expectations during the last quarter, thanks to the new products.
This has some insiders taking profits, and BlackRock, Inc. (NYSE:BLK) has lowered its rating, too. The average rating on the stock right now is a hold, with none of the 13 analysts following the stock rating it a buy.
The Bottom Line on SAM Stock
Sam Adams is a clever little company, and it now has a market cap of $2.5 billion. Founder Koch has stepped away from active management and assembled a nimble team under CEO David Burwick, all in their 50s.
You would have to be a contrarian to buy the stock, however, which has nearly hit analysts’ price targets for 2018, and in some cases exceeded them. Beer sales remain sluggish, especially for key brands like Boston Lager.
This is a company to root for, but not one to put your retirement money into. However, if you’re a contrarian and can afford to lose a bit betting a beer company can reinvent itself, knock yourself out.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.