For many people, their idea of a growth investment doesn’t include beer makers like Boston Beer Company (NYSE:SAM). However, SAM stock happens to be one of those names that are on the “right” side of the novel coronavirus. With the pandemic forcing a disruption to our usual routine, consumers essentially hoarded their favorite brands. But as Boston Beer’s latest second-quarter 2020 earnings report shows, this demand is still strong.
Against a consensus earnings-per-share target of $2.43, the company blasted expectations, delivering EPS of $4.88. That’s a positive earnings surprise of over 100%. In the year-ago quarter, Boston Beer posted EPS of $2.36, beating out the consensus estimate of $1.95.
On the revenue front, the brewery rang up $452.1 million, easily besting the consensus forecast calling for $426.2 million. In Q2 2019, the company generated top-line sales of $318 million. Because of the thorough beat, SAM stock jumped over 23% on the news relative to the prior day’s session.
However, it wasn’t just the overall numbers that got investors excited but rather, what the Q2 outperformance implied. According to Boston Beer CEO Dave Burwick in an interview with CNBC, “There’s this fundamental shift right now that hasn’t happened in the beer category since light beer was launched in the late ’70s, which is called hard seltzer.”
Specifically, Boston owns the Truly brand of hard seltzer, which has helped lift SAM stock in an otherwise bleak environment. With restaurants shutting down, the pandemic shuttered a good chunk of Boston Beer’s business.
This goes to show you what a relevant brand can do for you, even in a crisis. Here are three other reasons why SAM can keep on chugging.
SAM Stock May Enjoy Insulation from a Recession
Since I don’t have a crystal ball – at least, not an accurate one – I’m not going to suggest that we’re guaranteed to suffer a recession. However, if you’ve been paying attention to the news, the signs don’t look great.
Just recently, Senate Majority Leader Mitch McConnell introduced a counter-proposal for another coronavirus stimulus package. Since this may very well be the last package before the November election, the Republicans must make it count. Instead, McConnell fell way short of what the Democrats want, and has also angered fiscal hawks in his own camp.
Valued at around $1 trillion, the proposal provides “another round of direct checks to millions of Americans, more help for small businesses and money to help reopen schools.” However, barring a miracle, this proposal won’t help the millions facing eviction because the matter will be negotiated vigorously.
Hence, we may end up making recessions great again. But that won’t necessarily spell doom for SAM stock.
As a 2016 University of Buffalo study noted, “Periods of economic uncertainty tend to influence drinking problems among people who lose their jobs, as some turn to alcohol due to stress or because they have more free time and fewer responsibilities.”
In addition, the research paper stated that for people who didn’t lose their jobs in the Great Recession, they exercised “higher levels of excessive and ill-timed alcohol use away from work.” The idea is that both workers and the jobless experience stress, albeit on different spectrums.
And there will be a lot of that going on. So, this is a viable but cynical play on SAM stock.
Hard Seltzer Is Truly No Flash in the Pan
Invariably, whenever an asset flies higher like SAM stock did, there’s a chance that new buyers will end up holding the bag. Personally, I’d rather wait for sentiment to cool down rather than buying Boston Beer shares near their all-time highs.
However, preliminary data demonstrates that management’s strategic shift to hard seltzer is no gimmick. This isn’t like toilet paper, where people bought like mad in the early rounds of the pandemic. Later, when they realized that Covid-19 is a respiratory disease, not an excretory illness, things calmed down.
In contrast, people actually like hard seltzer. And as word-of-mouth spreads, especially among millennials with nothing better to do, sales will rise. With Boston’s Truly brand establishing dominance in this space, SAM stock provides a long-term narrative.
The numbers confirm this. According to a Nielsen study, hard seltzer sales hit $1.095 billion between March 21 and June 13 of this year. In 2019 during the same period, sales totaled only $273.3 million.
Just as impressive, from May 30 to June 13, the year-over-year growth rate in hard seltzer sales averaged nearly 246%. Thus, despite the law of large numbers working against the nominal sales trend, the YOY growth rate remains incredibly robust.
Aligns with Millennial Culture
Even if a vaccine comes around and reverts our new normal to the old one, I wouldn’t worry about SAM stock losing its edge. That’s because hard seltzers may very well be the paradigm shift that Boston CEO Dave Burwick referenced.
Primarily, millennials love sparkling water, which is basically regular seltzer. And this transition away from sugary soft drinks has had a major impact, including the way beverage kings like Coca-Cola (NYSE:KO) market their products. In that sense, Boston Beer is ahead of the game.
Of course, millennials also love alcoholic drinks – who doesn’t? Combine the two, throw in some trendy design themes, and you have a powerhouse brand.
Nevertheless, consumer trends can be whimsical. Therefore, if you do invest in SAM stock, you should do so responsibly. However, younger consumers’ shift toward clean, crispy beverages has been established over years, affording more confidence to the Boston Beer narrative.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.