Thursday, July 1, 2010

Celebrating Our Independence With SAM

The Boston Beer Company (SAM) declares that a brewery must be small, independent, and traditional in order to be considered an American Craft Brewer, which basically leaves just them among publicly traded companies. Sure Anheuser-Busch InBev (BUD) and Molson Coors (TAP) have specialty beers but their money products are in cheap bulk beer, the types you’d find scattered around any college campus or professional football game. Samuel Adam’s does not have any offering similar to these, and almost all of their products are priced significantly higher, yet they recently had their best first quarter in a long time with 44 cents diluted earnings per share and are expected to have a monster of a second quarter at over a dollar. However the reasoning for all of this is a bit fuzzy.

Over the course of the first quarter of 2010 Samuel Adam’s saw their stock price rise from $47 to $52 amongst generally peachy market conditions and has since shot up to a high of $74 during terrible conditions. On the last day of March they revised their expected annual earnings to between $2.65 and $2.95 (2009 year was only $2.17). They attributed their first quarter success to the launch of Samuel Adam’s Nobel Pils and a double digit increase in the shipping of Samuel Adam’s Boston Lager, Twisted Teas, and a range of their seasonal offerings.

Additionally their price margins were much improved, and though they are not expected to remain as high for the year they have set 54% as a full year target. SAM’s rising price was also credited to the fact that high quality imports were unable to reduce their prices in America. It should be noted that Grupo Modelo and Heineken have also performed admirably since 2009 but not to the level that Samuel Adam’s has. SAM was also celebrating their 25th Anniversary and saw an increase in promotional costs as a result, which in turn resulted in higher sales. perhaps they should constantly celebrate this milestone, the public is unlikely to pick up on it.

Now for some bad news, which isn’t really news at all, 3 months after the fact, but it is imperative to future growth prospects. The Sam Adam’s directors on their earnings call wanted analysts and investors to be very clear on the fact they will not be having any product releases for the next 2 quarters. This has not phased the stock price. They are also dumping loads of cash into renovating the Pennsylvania Brewery, which could involve the necessity of purchasing more kegs and this has not been reflected accounting-wise. This has not phased the stock price. They were also very adamant on the fact that they YoY numbers looked very appealing because they had a miserable Q1 2009, and this has lead to some very inflated growth rates. For instance, barrels sold were down from 2009 to 2010 from 514 to 457 yet revenue was up roughly 16%. Again, this has not phased the stock price.

It’s been a rough couple days for SAM, now having dropped about $9 in a little less than a fortnight. Some solace can be found in knowing that there has been decreasing volume in this time so perhaps there is not much strength in the decrease, and that it is amongst some very unfortunate market data. In this time their P/E multiple has fallen from 28 to 25 and could fall further if unemployment numbers are not favorable on July 2
nd. This may provide some solid entry points though since 2nd quarter earnings estimates are currently set for $1.135, setting SAM up for its best quarter in recent history. SAM’s P/E has been set at anywhere between 35 in October of 2007 to lows of 11 in early of 2009. It appears that the 20-25 range is comfortable as seen in the graph below.

Technically speaking, there is reason to worry as SAM is currently testing its 50 day moving average. We will have to see if there is a bounce, though it is not hopeful because of the aforementioned unemployment data. Using an average of their guidance ($2.65 - $2.95 2010 EPS) of $2.8 one could find that $63 is actually a very fairly valued price, taking the average of prices estimated using 20 and 25 as P/E. It is for these reasons that I would not advise currently buying the stock, and would seriously consider selling and taking some profits if the economy continues to sink because if this were to happen we could see a tightening in P/E multiples across the board.


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