Boston Beer Company Fundamental Analysis
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Boston Beer Company
Last Updated: 15 Feb 2023
NYSE: SAM
GICS Sector: Consumer Defensive
Sub-Industry: Beverages — Brewers
Table of Contents
You can download a summary of Boston Beer Company's fundamental analysis in PDF here.
Management
CEO: Dave Burwick
Tenure: 17.5 years
Boston Beer Company’s management team has an average tenure of 6.6 years. It is considered experienced.
Source of Revenue
The Boston Beer Company produces and sells alcoholic beverages including hard seltzer, malt beverages (“beers”), and hard cider in the United States and selected international markets.
Boston Beer Company produces alcoholic beverages at company-owned breweries and its cidery and under contract arrangements at other brewery locations. The four primary company-owned breweries are focused on production and research and development and include breweries located in Boston, Massachusetts (the “Boston Brewery”), Cincinnati, Ohio (the “Cincinnati Brewery”), Milton, Delaware (the “Milton Brewery”) and Breinigsville, Pennsylvania (the “Pennsylvania Brewery”). The company produces a small but growing amount of distilled spirits and spirits-based ready-to-drink beverages (“spirits RTDs”) at the Milton Brewery and other contract brewery locations.
Boston Beer Company also owns five smaller local breweries that are mainly focused on brewing and packaging beers for retail sales on-site at tap rooms and gift shops and restaurant activities. In addition, the company owns an apple orchard and cidery located in Walden, New York, a restaurant in Rehoboth, Delaware (“Chesapeake & Maine”) and a boutique inn in Lewes, Delaware (the “Dogfish Inn”).
Most all the company’s sales are made to a network of over 400 wholesalers in the United States and to a network of foreign wholesalers, importers, or distributors. These distributors, in turn, sell the products to retailers and other traditional and e-commerce retail outlets, where the products are sold to drinkers, and in some limited circumstances to parties who act as sub-distributors.
Boston Beer Company consists of one operating segment but sells its beverages under the various trade names “The Boston Beer Company®”, “Twisted Tea Brewing Company®”, “Hard Seltzer Beverage Company”, “Angry Orchard® Cider Company”, “Dogfish Head® Craft Brewery”, “Dogfish Head Distilling Co.”, “Angel City® Brewing Company”, “Coney Island® Brewing Company” and “Bevy Long Drink Co.”
Source: Boston Beer Company
Truly Hard Seltzer
The company’s Truly Hard Seltzer brand generally competes within the hard seltzer category which has similar characteristics to the beer industry for reporting and regulatory purposes. It offers over thirty styles of hard seltzer in the Truly brand family, most of which are available nationally in the United States.
Twisted Tea
Boston Beer Company’s Twisted Tea products generally compete within the flavoured malt beverage (“FMB”) category of the beer industry. The company offers over ten styles of flavoured malt beverages in the Twisted Tea brand family, most of which are available nationally in both the United States and Canada.
Samuel Adams and Dogfish Head Beers
The company’s Samuel Adams and Dogfish Head beers generally compete within the craft beer and domestic speciality beer categories.
Boston Beer Company offers over twenty styles of beer in the Samuel Adams brand family and the brand is recognised for helping launch the craft beer industry. Samuel Adams Boston Lager® is the company’s flagship beer that was introduced in 1984.
The company offers over twenty-five styles of beer in the Dogfish Head brand family. Boston Beer Company does not own distribution rights to the Dogfish Head beer and distilled spirits brands outside of the United States and Canada.
Angry Orchard Hard Cider
Boston Beer Company’s Angry Orchard ciders compete within the hard cider category that has similar characteristics to the beer industry. It offers over ten styles of hard cider in the Angry Orchard brand family, most of which are available nationally in the United States in various bottle, can and keg packages.
Dogfish Head Spirits and Spirit RTDs
The Dogfish Head brand began distilling spirits in 2002 and is considered one of the original craft distilleries. Boston Beer Company offers over 15 styles of distilled spirits under the Dogfish Head brand in small quantities that are sold in limited markets. In 2021, the Company entered the market for spirits RTDs through its Dogfish Head brand.
Boston Beer Company sells its products predominantly in the United States but also has markets in Canada, Europe, Israel, Australia, New Zealand, the Caribbean, the Pacific Rim, Mexico, and Central and South America.
Boston Beer Company Economic Moat
Boston Beer Company Economic Moat
Economic Moat: Narrow
There are many ways to identify Boston Beer Company’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Boston Beer Company. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Boston Beer Company’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? No.
Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.
Is the EPS growing for the past 5 years? Inconsistent.
Boston Beer Company Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Inconsistent.
Boston Beer Company FCF per Share
Management Effectiveness
Is Boston Beer Company’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Boston Beer Company Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Boston Beer Company Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is increasing, which is something that an investor would be not pleased to see.
Boston Beer Company Shares Outstanding (Million Shares)
Boston Beer Company Financial Health
Boston Beer Company Financial Health (USD Million)
Current Ratio: 2.1 (pass my requirement of >1.0)
Debt-to-EBITA: 0.3 (pass my requirement of <3.0)
Interest Coverage: 3819.8 (pass my requirement of >3.0)
Debt Servicing Ratio: 0 (pass my requirement of <30.0%)
Dividend
Current Dividend yield: The company has not reported any recent payouts.
Boston Beer Company Stock Performance
The graph set forth below shows the value of an investment in each of the company’s stock, the Standard & Poor’s 500 Index (“S&P 500 Index”) and the Standard & Poor’s 500 Beverage Index, which consists of producers of alcoholic and non-alcoholic beverages (“S&P 500 Beverages Index”) for the five years ending December 25, 2021.
Boston Beer Company Stock Performance
Boston Beer Company Valuation
Estimated intrinsic value: $164.10
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$100M
Projected growth rate: 6% - 7%
Beta: 1.05
Discount rate: 7.3%
Date of calculation: 15 Feb 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Boston Beer Company EV-to-EBITA vs its peers
Boston Beer Company Price-Earnings Ratio vs its peers
Boston Beer Company Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
One key concern is the competitiveness of its industry. The high-end and beyond beer categories in the United States are highly competitive due to the participation of large domestic and international brewers, as well as craft brewers and distilleries. AB InBev and Molson Coors are the two largest brewers in the U.S., and they are actively involved in these categories through new product launches, importing and distributing import brands, and developing or acquiring new brands. The market for hard seltzers, craft-brewed domestic beers, imported beers, and spirits RTDs is also expected to grow, increasing competition in the market.
Boston Beer Company's products compete with other alcoholic beverages, and many of its competitors have greater financial resources, marketing strength, and distribution networks. The entry of non-alcoholic beverage companies into the market may further increase competition, making it difficult for smaller beverage companies to maintain their market presence or enter new markets. The potential for increased costs to compete, reductions in contract brewing capacity, and decreased distribution support and opportunities may have a material adverse effect on the Boston Beer Company's business.
Next, the Boston Beer Company primarily sells its alcoholic beverages in the U.S., where it relies on over 400 independent beer distributors for distribution to retailers and consumers. However, the company's growth requires it to maintain these relationships and possibly enter into agreements with additional distributors. The termination provisions in the distribution agreements expose the company to risks, as some state laws prohibit the company from exercising its contractual rights. The company's existing distribution arrangements may also be affected by the influence of major beer producers on its distributors. If these agreements are terminated, the company may face difficulty in securing new distribution agreements on similar terms, leading to an increase in the cost of distribution. As a result, there is no guarantee that Boston Beer Company can maintain its current distribution network or secure new distributors on favourable terms.
Summary for Boston Beer Company
Boston Beer Company economic moat primarily derived from its intangible assets and having a cost advantage.
In the alcoholic beverage industry, strong brands are a key factor in creating economic moats. The industry is well-suited to branded offerings, as small changes in the fermentation process can create a variety of distinct tastes. Private-label products have low penetration, and U.S. producers are protected by intermediation laws. The Boston Beer Company is a good example of a company with a strong portfolio of brands that are leaders in numerous premium-priced malt beverage segments.
Besides branding, intangible assets can relate to a company strong distribution networks and supply chains. In the highly regulated alcoholic beverage industry, these factors are even more important due to three-tier distribution laws. Boston Beer Company has built a strong network of over 400 wholesalers and its reputation for providing high-quality and popular products has likely strengthened its relationships with wholesalers over the years. As craft beer has a short shelf life, the importance of product freshness makes Boston Beer Company's distribution network and supply chain even more critical to the company's success.
As a value investor focusing on economic moats, it is important to understand how cost advantages in the brewing industry develop. The way for cost advantages to develop is through scale-based leverage, which is the ability of larger companies to achieve cost savings through economies of scale. In the brewing industry, larger companies can achieve scale-based leverage by producing large volumes of beer using highly mechanised facilities.
While the industry has become more diverse in recent years, with a variety of beer options available, the top three brewers still control the majority of the market. The malt industry is also similar to carbonated soft drinks in that different beers typically fall somewhere in the middle of the spectrum in terms of differentiation. While the taste profiles of different beers can be distinct, they all have similar functional uses. As a result, leading operators such as Boston Beer Company can typically maintain sufficient volumes to achieve significant scale advantages.
Although Boston Beer Company possesses intangible assets and cost advantages as its economic moat, there are signs of constraints. Moreover, the company lacks other sources of moat. Hence, I will rate Boston Beer Company as narrow economic moat.
Boston Beer Company's performance has some concerning issues. While the company's revenue has increased over the past five years, the inconsistency in net income and operating cash flow raises concerns about the sustainability of the growth. Additionally, the negative free cash flow in 2021 suggests that the company's cash position may be unstable. Although Boston Beer Company's gross and net margins are in line with the industry average, its performance is worse than its historical levels.
Boston Beer Company's capital allocation performance has been mixed. Its ROE and ROIC have consistently met the minimum requirement of 15% in the past, however, in FY2021, both metrics fell below 10%. Currently, the company's ROE is lower than the industry average, suggesting management inefficiency. Although its ROIC is higher than the WACC, it still lags behind its historical performance.
I am impressed by the fact that Boston Beer Company has had no debt for the past five years and its financial health is in good shape. The absence of debt means that the company does not have to worry about covering interest payments, and its operating cash flow is not constrained. Furthermore, the current ratio, which measures a company's liquidity, suggests that the company is doing well.
With a narrow economic moat, weak performance and unstable capital allocation, I will assign a margin of safety of 40%. So, with an estimated intrinsic value of $164.10, I will only invest in Boston Beer Company if it is trading in the range of $99.
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