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A Sobering Performance in Craft Brewing

Tuesday - 5/14/2013, 3:42pm  ET

Be it their tasty beverages or strong fundamentals, popular craft brewer Boston Beer has attracted a lot of investor interest in 2013, but their first earnings report of the year had investors reaching for a glass of water. Despite posting a year over year increase in revenue of 20%, the company undershot the consensus earnings estimate by 18%, citing increased raw materials and advertising costs, as well as softness in their flagship Sam Adams line. This disconcerting information snowballed with a confidently ambiguous outlook for the rest of the year, as management stated that gross margins are still expected to reach 55% for the year, but in the next breath divulged that actual results on their full year earnings could “vary significantly.” Investors were sent into a selling rampage that washed down 11% of the stock’s value on more than seven times its average trading volume the following day. 

A worse scenario

Many have previously shied away from this company because of its consistently high valuations, but now the attention might turning to a very real, and even worse case scenario—a back alley brawl of craft brewing with the heavy weights of the beer industry, including Anheuser Busch InBev . The big dogs of beer have previously steered clear of craft brewing because the avoidance of those mass producing companies is an important factor to many of the consumers of craft beer. However, should InBev decide the time is finally right, they have clear leveraging capabilities in terms of scale and cash flow as a $150 billion company generating $4.9 billion in free cash flow last year, and they’ve also had their whistle wet in the craft brewing market for some time now with their 35% ownership stake in Craft Brewing Alliance . Craft Brewing Alliance is making quick progress for its comparably minute size to peers, growing revenues by 13.5% last year thanks to its lineup of satiating core brands including Redhook Ale, Widmer Brothers and Kona Brewing. This partial ownership gives InBev a powerful angle into the market of craft brewing, the same market that Boston Beer is hoping to grow aggressively into. With scalability becoming more of a reality in craft brewing, and many of those aforementioned companies’ popularity growing rapidly at the same time, this could put a serious damper on Boston Beer’s lofty growth agenda.

Adding insult to injury

Valuations over the last year for Boston Beer have become increasingly intoxicating. Since Q1 of 2012, their PE has crept up from the low 20s to elevated levels near 40 just recently before earnings, and is now hanging out in the mid-30s, while at the same time their PEG has shot up to 3 times its projected earnings growth rate for the next five years. These metrics are difficult to digest, even for a growth stock, but in its defense the crafty brewer has made a solid attempt at walking the walk. Revenue has been growing by at least 10% and as much as 30% in the last 5 quarters, except in Q4 2012, and with gross profit margins dialed in between 55 and 60 percent, their quest into growing profitability appears to hold some merit.

Boston Beer has performed spectacularly over the last 52 weeks, gaining 37% in its share price while continuing to buyback shares, but that dramatic rise also makes the assessment of its current value that much more difficult. It might be wise to sip responsibly on Boston Beer until further clarity is available on their true impact in the quickly growing, and highly competitive market of craft brewing.

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This article was originally published as A Sobering Performance in Craft Brewingon

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