Boston Beer Brews Up Solid Results, but Shares Frothy

Narrow-moat Boston Beer’s SAM full-year earnings largely met our expectations, with sales growing 15% versus our 16% estimate and operating margin contracting 180 basis points to 11.6%, matching our estimate. Top-line gains continue to be driven by volume, with 13% full-year depletion growth (11% in the fourth quarter) fueled by brands like Truly, Twisted Tea, and Angry Orchard. We’ve been impressed by Truly’s growth trajectory and think increased distribution, new flavors, and categorywide strength should support its momentum (management estimates hard seltzer volume grew 200% in 2018). However, the Samuel Adams brand remains soft, and we think the firm will need to make substantial investments behind its flagship offering in the form of marketing, refreshed packaging, or line extensions to revitalize growth. Over the long run, we expect revenue growth to fall to roughly 4% as the craft beer market decelerates and operating margins to average in the midteens as the firm invests in brewery capacity and efficiency and extracts costs from its supply chain. We anticipate lifting our $206 fair value estimate by a mid-single-digit percentage as we incorporate these results and the time value of money, but we continue to view the shares as overvalued.

As volume growth, particularly for Truly, continues to outpace management’s expectations, the firm increased its use of third-party brewers and employed incremental labor at its own breweries, leading full-year gross margin to contract 70 basis points to 51.4% and cost of goods sold per barrel to increase 2.9%. Media and point-of-sale investments, coupled with ongoing headwinds from freight and logistics costs (we estimate shipping costs per barrel increased 20% over the year prior), also hampered the bottom line. However, we expect that pricing (revenue per barrel increased 1.4% in 2018, and we forecast low-single-digit annual improvements) and cost savings should allow for margin expansion longer term.

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