BOSTON BEER INC -CL A SAM S
July 23, 2012 - 7:49am EST by
birdie11
2012 2013
Price: 111.34 EPS $4.20 $4.77
Shares Out. (in M): 13 P/E 26.5x 23.3x
Market Cap (in $M): 1,480 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 1,442 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Food and beverage
  • alcohol
  • Slowing growth
  • Earnings Miss
 

Description

We believe Boston Beer Co. Inc. (NYSE:SAM) is substantially overvalued at current prices, and is set to implode in the second half of the year.

 

Opportunity

 

In the 10Q for the quarter ending 31 March 2012, SAM guided 6-9% depletions growth. The most recent Nielsen data, as of June 9, indicates SAM’s beer volumes are down 6.5% in AOC data (which covers approximately 50% of volume and includes grocery, drug, and mass market channels). In order for SAM to meet guidance, growth through remaining channels (bar/restaurant, convenience stores) will need to be close to 20%. We do not think those growth rates are achievable. SAM may reduce guidance, catalyzing a fall in the share price. (Sources: 3,6)

 

Company Description and Valuation

 

SAM engages in the production and sale of alcohol beverages primarily in North America. The company sells approximately 60 beverages under the Sam Adams, Twisted Tea, Angry Orchard and HardCore brand names. SAM was founded in 1984 and is based in Boston, Massachusetts.

 

Valuation at $114.81

(Source: 1, as of 19 July 2012)

Market Cap (Class A and B common stock): $1,480.1M

TEV: $1,442.0M

2012 Consensus Sales: $560.49M

2012 Consensus EBITDA: $111.37M

2012 Consensus EPS: $4.20

Management Guidance: $3.80 to $4.20 (Sources: 15))

TEV/2012 Consensus Sales: 2.5x

TEV/2012 Consensus EBITDA: 12.5x

2012 P/E Consensus: 26.5x

 

The stock has moved up 26% in the last twelve months (as of 19 July 2012). SAM is good but not special. Would you pay 26.5x earnings for a company with 6% volume growth, assuming management can meet its target? The only way to support the current valuation from a fundamentals perspective is to believe that the craft beer segment will become thirty percent or more of the total US beer market and that SAM can maintain its position as the largest craft brewer by a significant margin. Let’s examine the beer industry first.

 

Beer Industry

 

The domestic beer market is $95.5B/year. Volume growth has been slow or negative over the last ten years, and a growing US population has masked a steady decline in beer consumption per capita. The major brewers are still losing share with ABI volume share down 40bp and MillerCoors down 80bp in 2011 on volume changes of -3.0% and -3.2%, respectively. The bright spot has been the craft beer segment, which has growing steadily since 2005, including 13.2% volume growth and 14.7% sales growth in 2011. Craft beer’s market share by volume was 5.7% in 2011 and 9.1% by sales. (Sources: 1,11)

 

 

US Total Beer Production

Source: (4)

Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Barrels (M)

199

199

198

195

198

197

198

198

200

196

194

Gallons per capita

21.9

21.7

21.3

20.8

21.0

20.7

20.5

20.4

20.4

19.8

19.5

 

 

US Craft Beer Production

Sources: (1,11)

Year

2005

2006

2007

2008

2009

2010

2011

Barrels (M)

6.3

7.1

8.0

8.5

9.1

10.1

11.5

% Market share (by volume)

 

 

3.8

4.0

4.4

5.0

5.7

Sales

$4,289

$4,921

$5,716

$6,314

$6,578

$7,587

$8,703

% Market share (by $)

 

 

 

 

 

 

9.1

 

 

SAM is the largest craft brewer. It is also losing share faster than its peer crafts. (See table below)

 

Top 10 Domestic Craft Brewing Companies

Source: (11)

Rank

Company

2011 Sales (Barrels)

2011 % Change

Share of Segment

Change in Share

1

Boston Beer Co.

2,096,000

6

18.28

-1.3

2

Sierra Nevada Brewing

857,500

9

7.48

-0.28

3

New Belgium Brewing

712,843

8

6.22

-0.31

4

Gambrinus

567,115

9

4.95

-0.2

5

Deschutes Brewery

220,913

9

1.93

-0.08

6

Matt Brewing

196,100

8

1.71

-0.08

7

Bell's Brewery

180,535

17

1.57

0.05

8

Harpoon Brewery

173,643

16

1.51

0.04

9

Lagunitas Brewing

165,420

55

1.44

0.39

10

Boulevard Brewing

157,277

6

1.37

-0.1

 

Craft Beer Competition

 

Competition in the craft beer space has increased dramatically and will continue to do so. The number of breweries in the US fell steadily from a high of 1,751 in 1900 to less than 100 in the 1980s, but has rebounded over the last two decades, climbing to over 2,000 in 1Q2012. There were an additional 915 applications for brewing licenses in 2011, which will lead to even more players entering a space which we believe is becoming saturated. One newcomer, Revolution Brewing, is expanding in Chicago with a new brewery in 2012 that has initial capacity of 25,000 barrels/year and eventual capacity of 100,000 barrels/year. (Sources: 7,11)

 

While the little guys are bringing competitive pressure from the bottom, the big players are pushing their own faux craft beers, bringing pressure from the top.  MillerCoors’ Blue Moon label is the single biggest craft beer in the country. ABI is looking to replicate Blue Moon’s success with its recent acquisition of Goose Island. In the alternative space, Blue Moon is rolling out a caramel apple spiced ale this summer. (Sources: 8,12)

 

On top of the pressure from the start-ups and the giants, the established craft brewers are ramping up competition for each other’s market share. Western craft brewers are pushing east into SAM’s home market. California-based Sierra Nevada is building a 300,000 barrel brewery in Asheville, CA. Colorado-based New Belgium is building a 400,000 barrel brewery, also in Asheville, NC. At the same time, Yeungling, a lower price regional brewer that is dominant in Pennsylvania with 2.5M barrel/year production, has moved into Ohio with plans for further expansion. Portland-based Craft Brew Alliance has targeted Chicago for its expansion. In the middle of this competitive field, SAM is betting on expansion westward out of New England to find its own growth. (Sources: 5, 9,11)

 

Warning Signs

 

Insiders have been selling recently.

 

Insider selling in the last 3 months (ending 10 July 2012)

Source: (1)

 

 

 

Insider Name

Position

Transacted Shares

Transaction Value ($)

James Koch

Founder and Chairman

52,339

$5,508,391

Martin Roper

CEO

33,000

$2,827,398

Pearson Cummin III

Independent Director

10,000

$992,875

Jean-Michael Valette

Independent Director

10,000

$798,468

Jay Margolis

Independent Director

6,000

$495,545

Kathleen Wade

VP Legal

800

$68,407

 

 

Recent growth has been unhealthy. Twisted Tea and Seasonals accounted for 70% of SAM’s growth in 2011 (see table below). Recent SAM volume and sales growth has come from filling distribution channels for Twisted Tea and meeting temporary demand for the Alpine Spring seasonal.

 

In regards to Twisted Tea, distribution channels are filling, suggesting growth will slow in the near term. Even in the case that Twisted Tea achieves equal distribution to Mike’s Hard Lemonade and Smirnoff Ice, distribution growth would slow y/y. (Source: 14)

 

In regards to Seasonals, Alpine Spring was a new variety, while the remainder of the 2012 Seasonals (Summer Ale, Oktoberfest, Winter Ale) are unchanged, suggesting the boost in growth from a new spring Seasonal will not be realized for the remainder of the year. (Source: 14)

 

 

Twisted Tea largest growth driver in 2011 

Source: (14)

Growth Driver

Percentage Point Contribution to Sales Growth

Twisted Tea

4.4

Combo Pack

3.4

Seasonals

2.1

Boston Lager

0.2

Cherry Wheat

0.2

Other

-0.1

Sam Light

-0.9

Total

9.4

 

 

Summary

 

The overall beer industry has not been growing, and per capita beer consumption is in a structural decline. The craft beer space has been growing, and will grow for a while longer, but craft beer won’t go from 5.7% to 30% of all beer sold. Furthermore, increasing competition will mean SAM won’t maintain as dominant of a position. SAM’s strategy is to expand westward, but Colorado and other western states already have local craft beers that they are loyal to. The western craft beer companies are already eating into SAM’s market share in SAM’s home territory on the East Coast, while the majors push their own faux crafts, and Yeungling tries to go national. Additionally, with the flagship Boston Lager flat to down, a slowdown in Twisted Tea or Seasonals will significantly impact sales growth, driving down multiples.

 

Conclusion

 

The assumptions needed to justify SAM’s valuation are unreasonable. The craft beer competition is intensifying. SAM’s growth will be flat to negative, with appropriate multiples for that kind of growth near 13x. Assuming $4 in earnings, we have a target share price of $52.

 

Risks

 

Acquisition by a major is a risk. However, Goose Island was acquired in 2011 by Anheuser-Busch for $38.8M , or 11.8x earnings, significantly below SAMs current P/E multiple of 26.5x. Stock buyback by the company is also a risk, although it is mitigated by the fact that the company only has $18.8M remaining on their $275M repurchase authorization, as of 27 April 2012. A further mitigation to the buyback risk is that management did not do a significant amount of buyback at stock prices 15% below current. (Sources: 6,10)

 

Sources

 

  1. CapitalIQ.com
  2. http://www.brewersassociation.org/pages/media/press-releases/show?title=brewers-association-craft-brewing-volume-hops-13-percent
  3. GSCO Equity Research. Americas: Beverages. 2 July 2012
  4. http://www.beerinstitute.org/
  5. BREW http://phx.corporate-ir.net/phoenix.zhtml?c=95666&p=irol-IRHome
  6. SAM 1Q12 10Q
  7. www.Brewersassociation.com
  8. http://www.thedenverchannel.com/money/31194439/detail.html
  9. http://www.newbelgium.com/Community/Blog/12-04-05/Really-Big-News-Asheville-we-re-coming-for-you.aspx and http://www.sierranevada.com/about/news.html
  10. BREW 2Q11 10Q and FY11 10K
  11. The New Brewer. May/June 2012.
  12. MolsonCoors Investor Relations
  13. http://beerpulse.com/2012/04/revolution-brewings-production-brewery-opening-with-25k-barrel-capacity/
  14. UBS Equity Research. Boston Beer Co. 9 July 2012.

 

 

The author of this report is short SAM, and may buy or sell the securities of SAM without disclosure. This report was prepared for the Value Investors Club for use only be investment professionals. The information presented in this report should not be considered a recommendation to purchase or sell any particular security, and all statements and expressions are the sole opinion of the author and are subject to change without notice.  Although the author believes that the expectations expressed in this report are accurate and reasonable, actual results could differ materially from those projected, and are subject to inherent risks and uncertainties.  Neither author nor its affiliates guarantees the accuracy or completeness of the information.  Securities trading involves a high degree of risk, and should only be undertaken by accredited investors

Catalyst

Growth will continue to decelerate and we believe it is highly likely that SAM will temper expectations and/or reduce guidance catalyzing a fall in the share price.
    sort by    

    Description

    We believe Boston Beer Co. Inc. (NYSE:SAM) is substantially overvalued at current prices, and is set to implode in the second half of the year.

     

    Opportunity

     

    In the 10Q for the quarter ending 31 March 2012, SAM guided 6-9% depletions growth. The most recent Nielsen data, as of June 9, indicates SAM’s beer volumes are down 6.5% in AOC data (which covers approximately 50% of volume and includes grocery, drug, and mass market channels). In order for SAM to meet guidance, growth through remaining channels (bar/restaurant, convenience stores) will need to be close to 20%. We do not think those growth rates are achievable. SAM may reduce guidance, catalyzing a fall in the share price. (Sources: 3,6)

     

    Company Description and Valuation

     

    SAM engages in the production and sale of alcohol beverages primarily in North America. The company sells approximately 60 beverages under the Sam Adams, Twisted Tea, Angry Orchard and HardCore brand names. SAM was founded in 1984 and is based in Boston, Massachusetts.

     

    Valuation at $114.81

    (Source: 1, as of 19 July 2012)

    Market Cap (Class A and B common stock): $1,480.1M

    TEV: $1,442.0M

    2012 Consensus Sales: $560.49M

    2012 Consensus EBITDA: $111.37M

    2012 Consensus EPS: $4.20

    Management Guidance: $3.80 to $4.20 (Sources: 15))

    TEV/2012 Consensus Sales: 2.5x

    TEV/2012 Consensus EBITDA: 12.5x

    2012 P/E Consensus: 26.5x

     

    The stock has moved up 26% in the last twelve months (as of 19 July 2012). SAM is good but not special. Would you pay 26.5x earnings for a company with 6% volume growth, assuming management can meet its target? The only way to support the current valuation from a fundamentals perspective is to believe that the craft beer segment will become thirty percent or more of the total US beer market and that SAM can maintain its position as the largest craft brewer by a significant margin. Let’s examine the beer industry first.

     

    Beer Industry

     

    The domestic beer market is $95.5B/year. Volume growth has been slow or negative over the last ten years, and a growing US population has masked a steady decline in beer consumption per capita. The major brewers are still losing share with ABI volume share down 40bp and MillerCoors down 80bp in 2011 on volume changes of -3.0% and -3.2%, respectively. The bright spot has been the craft beer segment, which has growing steadily since 2005, including 13.2% volume growth and 14.7% sales growth in 2011. Craft beer’s market share by volume was 5.7% in 2011 and 9.1% by sales. (Sources: 1,11)

     

     

    US Total Beer Production

    Source: (4)

    Year

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    Barrels (M)

    199

    199

    198

    195

    198

    197

    198

    198

    200

    196

    194

    Gallons per capita

    21.9

    21.7

    21.3

    20.8

    21.0

    20.7

    20.5

    20.4

    20.4

    19.8

    19.5

     

     

    US Craft Beer Production

    Sources: (1,11)

    Year

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    Barrels (M)

    6.3

    7.1

    8.0

    8.5

    9.1

    10.1

    11.5

    % Market share (by volume)

     

     

    3.8

    4.0

    4.4

    5.0

    5.7

    Sales

    $4,289

    $4,921

    $5,716

    $6,314

    $6,578

    $7,587

    $8,703

    % Market share (by $)

     

     

     

     

     

     

    9.1

     

     

    SAM is the largest craft brewer. It is also losing share faster than its peer crafts. (See table below)

     

    Top 10 Domestic Craft Brewing Companies

    Source: (11)

    Rank

    Company

    2011 Sales (Barrels)

    2011 % Change

    Share of Segment

    Change in Share

    1

    Boston Beer Co.

    2,096,000

    6

    18.28

    -1.3

    2

    Sierra Nevada Brewing

    857,500

    9

    7.48

    -0.28

    3

    New Belgium Brewing

    712,843

    8

    6.22

    -0.31

    4

    Gambrinus

    567,115

    9

    4.95

    -0.2

    5

    Deschutes Brewery

    220,913

    9

    1.93

    -0.08

    6

    Matt Brewing

    196,100

    8

    1.71

    -0.08

    7

    Bell's Brewery

    180,535

    17

    1.57

    0.05

    8

    Harpoon Brewery

    173,643

    16

    1.51

    0.04

    9

    Lagunitas Brewing

    165,420

    55

    1.44

    0.39

    10

    Boulevard Brewing

    157,277

    6

    1.37

    -0.1

     

    Craft Beer Competition

     

    Competition in the craft beer space has increased dramatically and will continue to do so. The number of breweries in the US fell steadily from a high of 1,751 in 1900 to less than 100 in the 1980s, but has rebounded over the last two decades, climbing to over 2,000 in 1Q2012. There were an additional 915 applications for brewing licenses in 2011, which will lead to even more players entering a space which we believe is becoming saturated. One newcomer, Revolution Brewing, is expanding in Chicago with a new brewery in 2012 that has initial capacity of 25,000 barrels/year and eventual capacity of 100,000 barrels/year. (Sources: 7,11)

     

    While the little guys are bringing competitive pressure from the bottom, the big players are pushing their own faux craft beers, bringing pressure from the top.  MillerCoors’ Blue Moon label is the single biggest craft beer in the country. ABI is looking to replicate Blue Moon’s success with its recent acquisition of Goose Island. In the alternative space, Blue Moon is rolling out a caramel apple spiced ale this summer. (Sources: 8,12)

     

    On top of the pressure from the start-ups and the giants, the established craft brewers are ramping up competition for each other’s market share. Western craft brewers are pushing east into SAM’s home market. California-based Sierra Nevada is building a 300,000 barrel brewery in Asheville, CA. Colorado-based New Belgium is building a 400,000 barrel brewery, also in Asheville, NC. At the same time, Yeungling, a lower price regional brewer that is dominant in Pennsylvania with 2.5M barrel/year production, has moved into Ohio with plans for further expansion. Portland-based Craft Brew Alliance has targeted Chicago for its expansion. In the middle of this competitive field, SAM is betting on expansion westward out of New England to find its own growth. (Sources: 5, 9,11)

     

    Warning Signs

     

    Insiders have been selling recently.

     

    Insider selling in the last 3 months (ending 10 July 2012)

    Source: (1)

     

     

     

    Insider Name

    Position

    Transacted Shares

    Transaction Value ($)

    James Koch

    Founder and Chairman

    52,339

    $5,508,391

    Martin Roper

    CEO

    33,000

    $2,827,398

    Pearson Cummin III

    Independent Director

    10,000

    $992,875

    Jean-Michael Valette

    Independent Director

    10,000

    $798,468

    Jay Margolis

    Independent Director

    6,000

    $495,545

    Kathleen Wade

    VP Legal

    800

    $68,407

     

     

    Recent growth has been unhealthy. Twisted Tea and Seasonals accounted for 70% of SAM’s growth in 2011 (see table below). Recent SAM volume and sales growth has come from filling distribution channels for Twisted Tea and meeting temporary demand for the Alpine Spring seasonal.

     

    In regards to Twisted Tea, distribution channels are filling, suggesting growth will slow in the near term. Even in the case that Twisted Tea achieves equal distribution to Mike’s Hard Lemonade and Smirnoff Ice, distribution growth would slow y/y. (Source: 14)

     

    In regards to Seasonals, Alpine Spring was a new variety, while the remainder of the 2012 Seasonals (Summer Ale, Oktoberfest, Winter Ale) are unchanged, suggesting the boost in growth from a new spring Seasonal will not be realized for the remainder of the year. (Source: 14)

     

     

    Twisted Tea largest growth driver in 2011 

    Source: (14)

    Growth Driver

    Percentage Point Contribution to Sales Growth

    Twisted Tea

    4.4

    Combo Pack

    3.4

    Seasonals

    2.1

    Boston Lager

    0.2

    Cherry Wheat

    0.2

    Other

    -0.1

    Sam Light

    -0.9

    Total

    9.4

     

     

    Summary

     

    The overall beer industry has not been growing, and per capita beer consumption is in a structural decline. The craft beer space has been growing, and will grow for a while longer, but craft beer won’t go from 5.7% to 30% of all beer sold. Furthermore, increasing competition will mean SAM won’t maintain as dominant of a position. SAM’s strategy is to expand westward, but Colorado and other western states already have local craft beers that they are loyal to. The western craft beer companies are already eating into SAM’s market share in SAM’s home territory on the East Coast, while the majors push their own faux crafts, and Yeungling tries to go national. Additionally, with the flagship Boston Lager flat to down, a slowdown in Twisted Tea or Seasonals will significantly impact sales growth, driving down multiples.

     

    Conclusion

     

    The assumptions needed to justify SAM’s valuation are unreasonable. The craft beer competition is intensifying. SAM’s growth will be flat to negative, with appropriate multiples for that kind of growth near 13x. Assuming $4 in earnings, we have a target share price of $52.

     

    Risks

     

    Acquisition by a major is a risk. However, Goose Island was acquired in 2011 by Anheuser-Busch for $38.8M , or 11.8x earnings, significantly below SAMs current P/E multiple of 26.5x. Stock buyback by the company is also a risk, although it is mitigated by the fact that the company only has $18.8M remaining on their $275M repurchase authorization, as of 27 April 2012. A further mitigation to the buyback risk is that management did not do a significant amount of buyback at stock prices 15% below current. (Sources: 6,10)

     

    Sources

     

    1. CapitalIQ.com
    2. http://www.brewersassociation.org/pages/media/press-releases/show?title=brewers-association-craft-brewing-volume-hops-13-percent
    3. GSCO Equity Research. Americas: Beverages. 2 July 2012
    4. http://www.beerinstitute.org/
    5. BREW http://phx.corporate-ir.net/phoenix.zhtml?c=95666&p=irol-IRHome
    6. SAM 1Q12 10Q
    7. www.Brewersassociation.com
    8. http://www.thedenverchannel.com/money/31194439/detail.html
    9. http://www.newbelgium.com/Community/Blog/12-04-05/Really-Big-News-Asheville-we-re-coming-for-you.aspx and http://www.sierranevada.com/about/news.html
    10. BREW 2Q11 10Q and FY11 10K
    11. The New Brewer. May/June 2012.
    12. MolsonCoors Investor Relations
    13. http://beerpulse.com/2012/04/revolution-brewings-production-brewery-opening-with-25k-barrel-capacity/
    14. UBS Equity Research. Boston Beer Co. 9 July 2012.

     

     

    The author of this report is short SAM, and may buy or sell the securities of SAM without disclosure. This report was prepared for the Value Investors Club for use only be investment professionals. The information presented in this report should not be considered a recommendation to purchase or sell any particular security, and all statements and expressions are the sole opinion of the author and are subject to change without notice.  Although the author believes that the expectations expressed in this report are accurate and reasonable, actual results could differ materially from those projected, and are subject to inherent risks and uncertainties.  Neither author nor its affiliates guarantees the accuracy or completeness of the information.  Securities trading involves a high degree of risk, and should only be undertaken by accredited investors

    Catalyst

    Growth will continue to decelerate and we believe it is highly likely that SAM will temper expectations and/or reduce guidance catalyzing a fall in the share price.

    Messages


    SubjectRE: Questions
    Entry07/23/2012 10:30 AM
    Membercnm3d
    utah,
     
    I know little about the story, but would love to hear why you think it is a hard short. thanks.

    SubjectRE: RE: Questions
    Entry07/23/2012 03:44 PM
    MemberAggie1111
    I am in agreement with Utah  that this is going to be a difficult short. The thesis, does make a point that SAM looks has room to trip up, but is the risk:reward there to short a best of breed company?
     
    SAM is the leader in the craft beer industry and its competative moat is large.  As the largest domestic craft brewer SAM enjoys meaninful leverage over its peers in production, distribution, placement, and marketing. Historically, this is inherently an industry where the big get bigger and tend to maintain higher margins than their smaller peers.  I would be interested in hearing more about the authors opinion on why SAM deserves a market multiple, and why the comming earnings miss is a short, rather than a long-term buy opportunity?

    SubjectRE: RE: RE: Questions
    Entry07/24/2012 06:47 AM
    Memberavahaz
    Aggie,
     
    What exactly makes SAM a "best of breed company"??
    a)the largest craft brewer is TAP as mentioned in the write-up, not SAM. 
    b) 2012 - according to mgmt's guidance  -will mark the 3rd consecutive year of operating margin compression...not exactly a sign of quality and countering your arguments about how they can leverage their scale
    c)SAM's beer volumes are in decline despite a pick-up for all other beer companies and categories, even the lagers which had been declining for the past 4-5years are growing again
     
    Why would a company with declining margins and a declining brand that has been losing market share in its category for years and is currently undergoing a competitve onslaught from 2 players that are ~20x its size and dominate the U.S. beer distribution chain, trade at a premium to the market??
     
    Seperately, i would like to add that SAM is NOT a takeover candidate b/c the larger U.S. brewers (ABI, TAP/SAB) would encounter antritrust objections, constellation has just done a huge deal (Modelo's U.S. business) and no one else has any scale that they could leverage in the U.S. (why would they just buy a declining brewer whithout any cost synergies??)
     
    The story that SAM is a unique asset as a craft pure play is no longer relevant b/c growth is underperforming even the lager brands and SAM is consistently losing share. So far, all this was masked by the Twisted Tea distribution gains and i believe birdie's argument is that this is now coming to an end so that the real inderlying trends will become more apparent.
     

    SubjectBirdie: Any thoughts on the quarter? Thanks.
    Entry11/02/2012 11:38 AM
    Memberbibicif87
     

    SubjectRE: Birdie: Any thoughts on the quarter? Thanks.
    Entry11/05/2012 04:06 PM
    Memberbirdie11
    Going into Q3 we believed seasonals would be strong (Octoberfest) and distribution gains by non beer products would be good as well.  I'll be the first to admit that the seasonals were stronger than we anticpated (however if one averaged the Q2 miss and Q3 the two quarters equalized out) and they had a good quarter; however, am surprised that the stock jumped on Friday as in spite of a good quarter guidance for 2012 remained flat and management guided to lower revenue growth and margin compression.  I am convinced as ever that its all uphill for SAM from here.
     
    Investors  in SAM are buying a company that is seeing slower revenue growth (we believe they will see negative depletions for beer next year - see below note), margin compression and higher costs across the board.  This doesn't even mention the fact that they have had to signfiicantly spend more on Cap Ex this year and will have to next as well and margins have still been declining.  If one goes from buying brewing capacity to making your own, generally this would be a margin increasing exercise but for SAM during this period margins have continued to fall for three years now. On 2012 and 2013 FCF SAM trades at close to 80 times FCF! Yes Cap Ex will eventually come down but even so the FCF multipe is off the charts.
     
    Am crammed with earnings calls right now but below is an exerpt from our Q3 partner letter and a couple of what we think are informative tables.........SAM has two categories of beverages: beer and non-beer.  While SAM’s Q312 volume (depletions) growth will benefit from solid Octoberfest seasonal sales, we believe that in 2013 their beer category depletions will actually decline year over year. Further, the pricing environment is getting tougher as both large and small competitors are more aggressively gunning for the craft beer space and margins are compressing as costs such as barley and marketing spend are rising.   In the past SAM has grown revenue by rolling out new products and filling distribution channels with them.   In late 2011, they established national distribution for Twisted Tea and then in early 2012 they released the Angry Orchard cider. These two non-beer products have masked the continuous deterioration in their beer business.  Both of these non-beer categories are small, however, Twisted Tea's growth has not only halted by is now slightly declining and we are confident that during the second half of 2013 Angry Orchard's will do the same.    In late 2012 or early 2013, the veil will be lifted and investors will see that they are buying a non-growing craft beer company for 27 times earnings in a space that is currently growing by double digits.  The CEO and CFO have sold over $45mm worth of stock and most other insiders are selling too.  There has been no insider buying.   We believe SAM's shares are worth $50 and can envision a couple of scenarios where they fall even further.
     

    US Beverages Comp Table

    Source: UBS SAM Equity Research Report 1 Oct 2012; FactSet

    Company

    Ticker

    Current Price ($)

    UBS Rating

    Price Target ($)

    2013 EPS ($)

    2013 P/E

    2013 PEG

    Cott

    COT

    7.99

    Buy

    10

    0.81

    9.9x

    0.56

    Molson Coors

    TAP

    45.35

    Neutral

    46

    4.22

    10.7x

    1.39

    Coca-Cola Ent.

    CCE

    31.20

    Buy

    34

    2.65

    11.8x

    0.84

    Constellation

    STZ

    32.60

    Buy

    40

    2.75

    11.9x

    0.62

    Dr. Pepper Snapple

    DPS

    44.40

    Neutral

    45

    3.32

    13.4x

    1.56

    PepsiCo

    PEP

    70.64

    Neutral

    71

    4.42

    16.0x

    1.93

    Coca-Cola

    KO

    38.31

    Neutral

    39

    2.23

    17.2x

    1.80

    Anheuser-Busch InBev

    ABI

    €66.8

    Buy

    €73

    €3.79

    17.6x

    1.77

    Monster Beverage

    MNST

    53.44

    Buy

    82

    2.72

    19.6x

    0.83

    Brown-Forman

    BFb

    65.05

    Buy

    73

    2.76

    23.6x

    1.95

    Boston Beer

    SAM

    113.70

    Sell

    96

    4.38

    25.9x

    2.83

     

     

     

     

     

     

     

     

    Beverages Average

     

     

     

     

     

    16.1x

    1.46

     

    Based on the UBS analyst running out the current trends, below the forecast for 2013 for SAM’s beer and non-beer categories.
     

    Yearly SAM Portfolio Growth By Segment

    Units: Depletions

    Source: UBS SAM Equity Research Report 1 Oct 2012

     

    2012

    2013 - (Our Calculation)

     

    Portfolio share at End of 2012

    2013 Growth

    Nominal Portfolio Share at End of 2013

    Normalized Portfolio Share at End of 2013

    Beer Segments

     

     

     

     

    Boston Lager

    20%

    -8%

    18.4%

    17.9%

    Seasonals

    28%

    8%

    30.2%

    29.5%

    Variety

    10%

    7%

    10.7%

    10.4%

    Other

    15%

    -15%

    12.8%

    12.4%

    Total Beer

    73%

    -1.25%

    72.1%

    70.2%

     

     

     

     

     

    Non-Beer Segments

     

     

     

     

    Twisted Tea

    20%

    0%

    20.0%

    19.5%

    Angry Orchard

    7%

    51%

    10.6%

    10.3%

    Total Non-Beer

    27%

    13.22%

    30.6%

    29.8%

     

     

     

     

     

    Total Portfolio

    100%

    2.66%

    103%

    100%

     

     

     

     

     

    SubjectInsider Selling
    Entry11/28/2012 11:12 AM
    Memberavahaz
    Has Jim Koch given any explanation for why is he is selling out of the company? Since March he has been selling almost every day with his stake in his company down below 100k shares from >350k in March and >400k in 2010

    Subject12/12/12 Guidance
    Entry12/13/2012 03:34 PM
    MemberAggie1111
    30 days to cover.  Shorts will have fun with that.  SAM = best of breed, and Angry Orchard offers a good case study..They literally came to dominate hard cider market in 6 months

    SubjectRe: Update
    Entry05/31/2016 11:20 AM
    Membercloud89

    Is anyone still following SAM? The stock is down 40% in the last year. Sales in the most recent two quarters are down from prior year. At this price is SAM a long? Analysts are projecting relatively flat EBITDA through 2018. The Company is currently trading at 10x 2017 EBITDA and 22x 2017 EPS, which do not scream cheap on an absolute basis. That said, over the last 10 years SAM has traded at an average EBITDA multiple of 14x and average P/E multiple of 32x. The current trading level represents a sizeable discount to historic trading levels, which could be warranted given the recent revenue trends. Could a case be made that EBITDA actually grows slightly through 2017/2018? If so, then it's possible EBITDA ends up greater than analyst estimates, resulting in an increase in the share price which could be even greater if the multiple expands as well closer to its historic average.

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