Justin Sullivan
Investors in Boston Beer (NYSE:SAM) have had a real hangover after a crazy momentum run during the pandemic, although truly long term investors still sit on decent gains.
In May 2019 I concluded that the Dogfish acquisition did not look like a dog, with the transaction announced at a time when the business was seeing some real operating momentum.
Where Do We Come From?
After posting double-digit sales and volume growth in the earlier 2010s, Boston Beer posted flattish results in the years 2016/2017, at the time posting earnings at around $7 per share. Trading around $150 at the time, while operating with some net cash, valuations looked non-demanding. After some years of stagnation, Boston Beer has seen some growth again heading into 2019 as this triggered a rally towards $300 in May 2019.
This valued the 11.6 million shares outstanding at $3.4 billion, or $3.3 billion if we factor in a small net cash position as well. With earnings set to rise to $8-9 per share, valuation multiples had expanded a huge deal of course, at around 30 times earnings. Part of this could be explained because of the fact that sales multiple looks pretty low, in part because Boston Beer posts margins which lag those of its major and much larger peers.
Shares were furthermore seeing some momentum on the back of a $300 million deal for Dogfish Head Brewery, combining two beer pioneers under a roof, adding IPA and session sour brands to the product portfolio.
A Massive Boom Bust
Little could one have expected that the pandemic would strike the world a year later, sending shares up to $1,400 per share and by now shares are actually down to $357 per share, more or less the same price as shares were trading in May 2019, some three years ago. We actually traded at the same levels, after shares have seen a bit of a recovery in the past few sessions and weeks, after shares even traded below the $300 mark.
Net revenues rose 39% in 2020, driven by depletion growth, with revenues posted at $1.74 billion. Operating earnings rose 68% to $246 million as great operating leverage was displayed upon. Net earnings rose from $110 million to $192 million as consumers spend more on (craft) beers at home with earnings posted at $15 per share and change.
The company guided for another 40% growth in 2021, with earnings seen anywhere between $20 and $24 per share. On the back of this guidance and results, valuation multiples expanded in a huge way, as shares traded above the $1,000 mark early in 2021, but by the turn of the year into 2022, shares were back to $500 again, only to see shares fall to $300 (and just below that) in recent weeks.
2021 revenues rose 18% to $2.06 billion with selling, promotion and advertising expenses up 35%, not delivering on the results. This made that full year operating earnings came in at just $8 million, including a near $50 million contract termination and asset impairment charge as well. The issue is that fourth quarter sales fell by a quarter as the company posted an operating loss in excess of $70 million that quarter! This was the reversal of the hard seltzer category and supply chain issues, causing real uncertainty in order to issue a decent outlook for 2022.
For this year, the company guided for 4-10% growth in depletion and shipments, with earnings seen between $11 and $16 per share. After a very tough first quarter, Boston Beer posted a 2% increase in second quarter sales toward $616 million. Second quarter operating profits of $71 million look pretty decent, after break-even results in the first quarter, as it seems that if the situation is stabilizing here.
Despite the reasonable second quarter, the company actually cut the full year guidance, now seeing depletion and shipment declines at a midpoint of 5%, with gross margins seen down a full two percentage points as well. This double whammy to the outlook made that earnings are only seen between $6 and $11 per share this year, hardly an encouraging result.
And Now?
With a $4 billion valuation applied to the business here, the company trades at less than 2 times sales, as the earnings numbers have taken a huge beating, the extent of which is still unknown. Pegging earnings power around $8 per share, current multiples are very high at around 40 times earnings, but operating margins are very low.
In the meantime, Boston Beer is much more volatile than regular beer brewers, given that it focuses so much on specialty categories, with real demand during the pandemic now offset by stiff competition and price declines, making the business a lot more uncertain from an inherent point of view.
The truth is that the pandemic might have actually hurt the business, as it needed so scale up rapidly, and while it earned extra profits as a result in 2020, the company incurred a lot of growth costs as well in 2021, with the situation still being highly uncertain.
In the meantime, we have to look at the potential if the company performs according to normal conditions. The reality is that Boston Beer typically posted operating margins at 10-15% in recent years, as that would translate into $200-$300 million in operating earnings based on a normalized $2 billion run rate in terms of sales. With no interest expenses due, and assuming a 25% tax rate, we could see earnings come in between $150-$225 million, which really suggests a $12-$18 per share guidance. At the midpoint of $15 per share, the multiple here looks decent in the low twenties, certainly as the company holds over $10 per share in net cash. In the meantime sales multiples are lower as well, as a bigger giant might be able to reap the benefits of this, yet shares are more or less ¨controlled¨ as perhaps the pandemic has created a tougher point of view from a competition angle as well.
Right now is the time to get more upbeat again, after the last two years were really not indicative in terms of operating performance or share price performance, which makes that I see appeal here. While I am happy to take a modest position, I lack conviction to initiate a full position just yet.
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