In mid-February, I wrote that Boston Beer (NYSE:SAM) stock had significant upside. The catalyst, I argued, was the company’s Truly hard seltzer line.
That case certainly has played out. SAM stock has rallied over 90% since that call. A big chunk of the gains came on Friday, as shares soared 26% on the back of a hugely impressive earnings report.
I don’t bring up my February call for the purpose of patting myself on the back. (Well, maybe a little.) Rather, I do so to highlight one of two reasons why SAM stock still looks like a buy: even at a higher price, that bull case still holds.
Meanwhile, as impressive as second quarter results were, they can get better. In fact, they will get better.
So, yes, SAM stock looks expensive. Obviously, it’s more expensive than it was just a few months ago. But there’s still room for more upside ahead.
A Blowout Earnings Report
In a normal environment, Boston Beer’s second-quarter results would be impressive. Amid a pandemic that has closed bars and restaurants, the numbers are absolutely spectacular.
Revenue for the quarter increased a whopping 42% year-over-year. That was almost ten percentage points higher than Wall Street expected. And it wasn’t a matter of pricing, either: volume rose almost 40%. Only a small portion came from last year’s acquisition of Dogfish Head Brewing.
The numbers are even better on the bottom line. Earnings per share more than doubled. A tax benefit of 19 cents (against just two cents the year before) helped to a small degree. But operating income rose 108%, even with some incremental spending related to the novel coronavirus pandemic.
Looking at those numbers, it’s not hard to see why Boston Beer stock soared on Friday.
This Can Get Better
What’s exciting about the Q2 report is that the company hardly was running on all cylinders.
After all, the company saw over $4 million in direct costs related to the pandemic in Q2 alone. After-tax, that’s about a 25-cent hit to earnings.
But there were indirect effects as well. Most notably, the pandemic limited Boston Beer’s capacity. The company thus had to turn to third-party breweries to meet demand. That contributed to a 350 basis point reduction in gross margins. After-tax, that’s another dollar or more in earnings per share. And Boston Beer lost some sales as well, as a result of out of stocks.
Meanwhile, Truly led the way in terms of revenue growth. But this is hardly a normal summer. Outdoor gatherings are still rare. The kinds of events for which hard seltzer is best fit simply didn’t happen as often as they usually would.
In other words, as good as Q2 was, it could have been better. As we return to normal, it will get better, in terms of both revenue and profit margins.
The Case for SAM Stock
To be sure, SAM stock has priced in that good news to some extent. After Friday’s rally, the stock trades at almost 70x the midpoint of 2020 earnings per share guidance.
That’s a huge multiple. But it’s not quite as big as it sounds.
For one, 2020 results, again, include the impact of the pandemic. That had a particular impact in the first quarter, in which earnings declined by more than 25% year-over-year. Looking to 2021 results (and beyond), Boston Beer stock looks much cheaper.
Second, the opportunity is enormous. As I detailed in February, millennials in particular are adopting hard seltzer at a fast rate. As a result, wine sales are declining.
The wine market in the U.S. alone is over $70 billion. In February, Boston Beer’s roughly $5 billion market capitalization looked particularly attractive in the context of that opportunity.
That market capitalization now is $10 billion. But there are still many billions of annual revenue up for grabs. There’s certainly more than enough for that $10 billion figure to keep rising.
Finally, if there’s been one lesson in this market, it’s this: valuation isn’t a reason to sell a quality business. Investors intrigued by the alcohol industry could look elsewhere — but to which names?
Anheuser-Busch (NYSE:BUD) is late to seltzer, has a fading macro beer business, and is struggling with debt. Molson Coors (NYSE:TAP) might be in worse shape. Constellation Brands (NYSE:STZ,NYSE:STZ.B) has a more intriguing case, but has shown weakness in categories like wine and spirits.
The best stock in an industry isn’t going to be cheap. Investors will pay up for a business with a massive opportunity. SAM stock qualifies on both fronts. That’s why the stock not only isn’t going to get cheap, but likely has more room to run.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.