Boston Beer Co.: Room for growth?
The brewing industry has gone through a sobering period as American consumers’ tastes in alcoholic beverages gravitated toward spirits. But in the last few years, Boston Beer Co. Inc. (NYSE: SAM) and other craft brewers have experienced resurgence, despite the growing global demand for liquor.
With the prime summertime beer-drinking months just getting under way, Boston Beer hopes it has the product mix to quench the thirsts of finicky consumers seeking higher-end brews, in order to spur its sales and maintain some heady growth.
Boston Beer was one of the pioneers in the craft beer business. Jim Koch founded the maker of Samuel Adams brand beer in 1984, based on recipes handed down through his family. The company quickly grew from a Northeast U.S. novelty, and went public in late 1995. Company chairman Koch continues to serve as spokesman, evangelist – and clerk, according to the Boston Beer website.
In the Boston Beer 2006 annual report, Koch and president and CEO Martin Roper wrote to investors that 2007 would be an important year for the company, that it’s “an interesting point in our growth.”
They noted that 35 years ago, the craft beer market barely existed, with domestic brands accounting for 98% of sales. Better beers (including crafts) have grown to 18% of U.S. sales, regular-strength domestics have evaporated to 33%, while light beers now represent about half the market. “Today Samuel Adams has just (one half percent) of that total U.S. beer market, which gives us room for growth in the only segment of the industry that is on the rise. We are not content to ride this wave, however, we are committed to help create the wave and reinforce its momentum.”
Investors were probably feeling a little tipsy after the company reported its first-quarter earnings in early May. The company said in the three months ended March 31, net revenue grew 27.4% to $72.4 million, and net income more than tripled, to $5.8 million from $1.8 million the year before – despite rising costs for its mainstay ingredients, barley and hops.
Net revenue per barrel of its core products increased by 3% in the quarter. Core shipment volume was 400,000 barrels, a 23.7% increase over the prior year’s quarter. Earnings per share rose to $0.40 from $0.13 in the 2006 quarter.
Boston Beer has benefited from consumers looking for different taste experiences. According to ACNielsen data earlier this year, retailers are carrying more craft beers on their shelves, a 16% increase year over year. Craft brews have been gaining market share for the past three years.
But what has really keyed Boston Beer’s resurgence is a return to its roots. It has expanded its line of brews to 21, and promotes special packs of seasonal beers – such as the current “Summer Styles Variety Package” that retails for $13.99 to $15.99 a 12-pack. It has also encouraged its fans to vote on what beers they’d like to see added to the product mix. To help promote craft beers, the company staged a contest offering enthusiasts the opportunity to have their concoctions distributed alongside Sam Adams in a “Longshot Mix” six-pack.
The growth is coming, but so is the competition, especially from the big boys, most notably Heineken N.V. (OTC: HINKY) and Anheuser-Busch Companies, Inc. (NYSE: BUD). Koch told analysts on the conference call following the earnings release: “… there’s increased attention to the offerings from the large domestic brewers, things like Blue Moon, the Leinenkugel rollout, A-B’s equity brands like Red Hook and Widmer and Goose Island and Dominion. And the imports are all getting more active.”
The company also is lending its brewing skills to other products, most notably a flavored malt concoction called Twisted Tea and a hard cider under the HardCore Cider brand. That move helped spur the industry’s giant, Anheuser Busch, to also go in the “tea” direction with such fruit-flavored hard teas as Mxologi Hurricane with 12 percent alcohol. Still, Twisted Tea has been on the market for six years, so Boston Beer has a head start.
Boston Beer also has pushed the envelope with such products as its Millennium and Samuel Adams Utopias – “extreme” beers that are akin to a cognac or porter, rather than the traditional beer.
Taking a page from the wine industry, Boston Beer also set out to develop the perfect glassware for what the company considers its perfect pint. The company is selling the Samuel Adams Boston Lager Pint Glass, pitching it to the beer connoisseur at $30 for a four-pack.
Success breeds the need to expand to meet demand, and Boston Beer is growing. It is working on plans to build a new Massachusetts brewery, which would add to or possibly replace its existing hometown operations and another facility in Cincinnati. But until a decision is made on whether to invest in the new brewery that would cost upwards of $200 million, the company has turned to a former Rolling Rock brewery in Latrobe, Pa.
Production began on May 21 at the brewery east of Pittsburgh, and the company expects to make at least 250,000 barrels annually at the plant. The company’s products also are made under contract at four other U.S. breweries, yet Boston Beer faces an important 2008 deadline, when a contract with Miller to make some of its products expires.
Share price has climbed, especially in the past year, and it has recently been trading near its 52-week high of $37.50, reached on Nov. 7, 2006. Still, analysts are somewhat lukewarm about whether Boston Beer’s stock is a wise investment. Analysts surveyed by Thomson Financial have it as a hold, while the consensus estimates call for full-year revenue growth of 18% and earnings growth of 22%.
For instance, while Deutsche Bank’s Andrew Kieley recently wrote to investors about the “1Q home run,” he maintained a “hold” rating on the shares. Still, he raised his target price to $36 from $34 while noting the robust growth.
The company’s May 31 annual meeting of shareholders might present investors with a better view on whether it will build the new brewery, or perhaps buy into the existing Latrobe plant to meet its long-term needs.
Just as Boston Beer is hoping to capitalize on the thirst for its products, investors also might find there’s some room for growth in its share price. A takeover from another company with deep pockets also is not out of the question, and with all the private equity being tossed around, it’s possible that the board might be presented with an intoxicating offer too good to pass up.
