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Tuesday, December 6, 2022

Should Investors Raise a Glass to Boston Beer Company?

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One of the strongest gains on a bullish day for the market is the Boston beer company (NYSE: SAM). The company, which is synonymous with its signature Sam Adams beers and Truly Hard Seltzers, reported earnings per share (EPS) of $2.21 on revenue of $596.45 million. The top line number exceeded analyst estimates by $566.42 million. But the bottom line was below the $3.48 expected.


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Nevertheless, EPS was a significant improvement from the previous year when earnings were negative. However, investors may be concerned that the earnings figure is not an improvement from 2019. Earnings per share of $2.21 were 38% lower than in 2019. Even though sales increased by 57% over the same period.

Seltzer sales remain a problem

Part of the problem is that Boston Beer is trying to find the right product mix. The company overestimated the demand for its Truly Hard Seltzer brand. Sales skyrocketed during the pandemic, but demand plummeted as consumers returned to bars and restaurants in 2021.

This created a situation reminiscent of a real Boston Tea Party. The company had to dispose of millions of boxes of unsold inventory. That is a major reason why the company was not profitable in 2021.

However, the company sees strength in its Twisted Tea and Hard Mountain Dew brands that are part of its “Beyond Beer” portfolio. And beer sales itself remains strong. That was an industry-wide dynamic this quarter. And to find the answer to that, we can look at the lingering power in travel and entertainment.

How long are the Travel Coattails?

When a stock makes such a big move after profit, it suggests that the results surprised people. But perhaps investors shouldn’t have been so surprised. The beer and spirits industry is an adjacent industry for travel and entertainment experiences. The two go together in many cases, like peanut butter and jelly.

And if, as expected, more people travel for the holidays in 2022 than in any of the last two years, that would likely mean the possibility of another strong quarter for Boston Beer. The question for investors is how long those coattails are. Because without it, continued inflation would indicate that many consumers will try to trade in for cheaper brands or: waive discretionary alcohol purchases all together.

The company lowered its guidelines again

It is this dynamic that could cause Boston Beer to lower its earnings expectations again. The company now says its full-year adjusted earnings will be between $7 and $10. This is a cut near the top of the $6 and $11 range forecasted in April. And it’s a significant drop from the original forecast for $11 and $16.

SAM shares are now trading above the 2019 level. And the strong numbers on the top line might just make it worthy of those numbers. I appreciate the company’s candor about the supply chain and the potentially reduced demand. And while I believe sales tell the ultimate story, the stock seems more prone to going lower than going higher.

Analysts Followed by MarketBeat give SAM stock a Hold rating with the potential 10% downside risk to the stock. That could change if analysts weigh in after this earnings report. But there is nothing to indicate that the rating will fundamentally change. This is one case where I like the product more than the stock.

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