Is the ban back? Boston Beer Company shareholders feel like it’s
Bucking the trend of many pandemic-era stocks, boston beer company (SAT 4.36%) wasn’t a tech darling, but its revenue and earnings skyrocketed in 2020. As a result, the stock skyrocketed – from $300 to over $1,000 in just nine months.
The good times didn’t last for the creator of Samuel Adams, Angry Orchard and Truly Hard Seltzer, as the stock has gone back and forth since its rise and now sits below $400. With such an epic rise followed by a rapid fall, is Boston Beer a buy?
A beer company is no more?
Boston Beer Company was founded in 1984 and started with its line of Samuel Adams beer. This brand worked well for the company, but Boston Beer expanded when it bought Dogfish Head Brewery in 2019. With brands like Angry Orchard, Twisted Tea and Truly Hard Seltzer, this acquisition marked the transition from the company from a simple beer manufacturer to a beer and alternative beer producer.
Unknown to consumers at the time of the acquisition, Seltzer was poised to take the market by storm. In 2020 alone, Seltzer took 5% market share from standard beer. This surge propelled Boston Beer shares higher, but then significantly affected the company when demand began to decline.
Besides sales, there are a few other metrics that help investors understand the performance of beer companies. Depletions is the volume sold by distributors, and shipment volume is the volume transferred to distributors. Along with sales, these two metrics paint a picture of how quickly the product moves from manufacturer to distributor to consumer.
Unfortunately for the Boston Beer Company, those numbers were abysmal in the first quarter. Shipment volume was down 25% year-over-year and burnouts were down 7%. With such an imbalance, investors may wonder what is going on. According to company management, distributors are keeping inventory levels well below 2021 values.
Slowing commodity demand is not something an investor wants to hear. As a result, revenue fell 21% for the quarter and led the company to report a net loss of $0.16 per share. Not only did sales plummet, but its gross margin was also hit, falling to 40.2% from 45.8% a year ago.
The declining gross margin means Boston Beer Company has relatively little pricing power, a bad sign for investors. Whether it can’t pass price increases on to the consumer, negotiate better terms with its suppliers, or a combination of the two, Boston Beer Company could have a tough 2022.
However, the company still thinks it can increase burnouts and shipments between 4% and 10% for the year. He also estimates that he can produce between $11 and $16 in non-GAAP (generally accepted accounting principles) earnings per share. However, this assumption requires Boston Beer’s gross margin to go up between 45% and 48%. These appear to be pink splashes, and I don’t know if Boston Beer can meet them.
An undervalued title
A saving grace for Boston Beer shares is its cheap valuation. Due to its recent unprofitability, any measure like free cash flow or earnings is skewed. Therefore, pricing the company from a price-to-sales (P/S) perspective allows investors to make the best apples-to-apples comparison possible.
According to its chart, Boston Beer’s valuation has reached levels not seen since 2018. Moreover, it is valued below its pandemic sell low. This low valuation is not a buy recommendation but an interesting proposition.
If you think Boston Beer Company can turn around and post strong numbers for the rest of the year and through 2023, this valuation may provide a great opportunity to buy the stocks on sale at a slight discount.
However, there are simply too many factors beyond Boston Beer’s control for me to invest in the stock. It relies on consumer trends to boom or bust, which has benefited the company in 2020 but hurt it in 2022. With a lack of pricing power and rising shipping costs , Boston Beer could still have a problematic 2022. For my money, there are too many better stocks available in the market than Boston Beer Company right now.