Boston Beer Stock: True Unmaterialized Demand Continues to Hurt (NYSE: SAM)

Boston Beer Company, Inc. (New York stock market :SAT) is misplaced. It has invested its resources heavily in products that are no longer popular and has paid the price over the past fiscal year. The stock market has lost confidence in the stock, and we saw the price decrease of 13.24% compared to the previous year and short-term interest increases to 6.12%.

The company has invested heavily in hard seltzer, Really. While there was initial demand which led to a major increase in sales for the company. Moving into 2021 and 2022, SAM continued to push Truly, which has really lost its appeal to customers. Its price-to-earnings ratio of 40.90 is well above that of its peers, indicating that although the stock price has fallen significantly, it may still be overvalued. To save face, SAM is investing in rebranding efforts. However, is it enough to reverse the downward trend? trending financial performance? SAM pointed to its Twisted Tea success, which only accounts for a small percentage of overall profits. With a long way to go and no clear growth strategy from the management team, I would not recommend buying this stock but giving it a holding rating.

Insight

SAM, the company to revolutionizing craft beer, was founded in 1984 and floated on the stock exchange in 1995. Although best known for its beer brands, the company is evolving into a broader beverage company, aiming to be a leading provider of alcohol categories premium beer and beyond. It produces and sells alcoholic beverages under several different brands. However, only two brands are showing strong performance: Twisted Tea and craft beer Dog Fish Head. Unfortunately, these are not the brands that SAM invested heavily in, anticipating significant demand for the Angry Orchard and Truly brands, that did not materialize.

These days, SAM makes more soda water and tea than beer, with only about 10% of its portfolio focused on beer. Management is once again trying to reinvent its Hard Seltzer brand with a new branding effort. There is little confidence within the stock market regarding these efforts and the impact on their downward sales.

The challenges of the beer industry, as well as fierce competition

The beer industry has been facing strong headwinds for decades, competing with the growing demand for hard liquor. Over the past few years, many brewing companies have followed similar transition strategies to diversify their brand portfolios in the highly competitive alcoholic beverage market.

While the market experienced a general slowdown, SAM still lagged behind its competitors. It is underperforming the market and losing its brand prestige in its sales of traditional beers and hard seltzer drinks. Unfortunately, SAM’s performance has deteriorated in the last period, mainly due to betting on the wrong products in their portfolio. SAM has invested heavily in Truly and Angry Orchard, and consumers are not interested in these products. Since 2021, the company is overbuying and facing the costs involved. If we compare SAM to Constellation Brands (ZST), which also has a large and diverse portfolio, the management team made better decisions about which products to focus on. If we look at the valuations of SAM and some of its larger peers, Molson Coors (FAUCET), STZ and Anheuser-Busch (BUD), we can see that the stock is overvalued through its P/E ratio and its EV/EBITDA ratios.

Release of fourth quarter and full year 2022 results

SAM released its fourth quarter and full year results revenue report in February 2022. Results have been mixed. The company improved year-over-year revenue in the fourth quarter of 2022 by 28.6% to $447.5 million, and shipment volume increased by 16.7% to approximately 1.71 million barrels. It has also doubled its revenue since 2019 to $2.1 billion in sales for fiscal 2022. However, SAM has exceeded EPS expectations only once in the last four quarters. For the fourth quarter, the company reported negative EPS of $0.92, missing expectations of $1.51. We are seeing disappointing results from the actual annual EPS performance over the past five years.

We can see a decline in operating margin to 4.34% this year, given that fiscal year 2021 was an outlier. In 2019, profits fell -8.50%. In 2020, revenues fell by -16.43%. In 2021, revenues fell by -15.38% and in 2022, revenues fell by -71.72%. The average annual decline in earnings has increased to 28.01% since 2019. The management team expects to start the new fiscal year with a net loss for the first quarter of 2023 and estimates GAAP EPS between $6.00 and $10.00 $ for the full fiscal year of 2023, which falls under the consensus of $11.47.

Balance sheet

SAM has a strong balance sheet and positive free cash flow, which means the company can invest in the business and reward shareholders. He ended the year with $182 million in cash, $150 million in unused credit lines and $55.60 million in debt. It has a positive leveraged free cash flow of $107.92 million. The company plans capital expenditures between $100 million and $140 million for 2023 to improve efficiency and build capacity. Although SAM did not repurchase any shares in fiscal 2022, for fiscal 2023 the company purchased $8.9 million of stock, with $81.5 million remaining.

Assessment

For the next fiscal year, estimated EPS is $7.80, with an FWD price/earnings ratio of 40.94. SAM’s stock price peaked at $1,200 in 2021 and fell to near $317. Seeking Alpha’s Quant Rating for SAM’s valuation is a D+. The action was heavily criticized due to its disappointing results. The stock has lost a lot of appeal over the past year and many analysts have downgraded their rating to underperforming and neutral.

Final Thoughts

Although SAM doubled its revenue between 2019 and fiscal 2022 to $2.1 billion in sales, it failed to realize its profits. While hard seltzer initially drove growth, consumer demand for the product dropped significantly, leading to lower financial results. The management team is mispredicting consumer demand, and the stock market has not reacted well to its latest earnings report and forecast for the next fiscal year. Although the company has a healthy balance sheet, I think the management team needs to do more than revamp its failing Seltzer brand. Therefore, I recommend a sustain rating.