The Boston Beer Firm Inc. (SAM) has delivered astounding 35% development quarter for quarter, outpacing its competitors and posting above-average margins in comparison with different beer corporations. The stock market has rewarded firm’s superior efficiency and the share price of the Boston Beer Firm tripled because the onset of COVID-19, whereas the share costs of the opponents suffered a blow in March and have not recovered ever since. We consider the stock market overreacted to the sturdy development on the Boston Beer Firm in Q3 2020 and the shares price has presently extra draw back threat that upside potential.
If you happen to listened to administration’s quarterly commentary all through 2020, you could not assist however discover how a lot of administration’s dialogue and a focus went to the newly launched Really Laborious Seltzer Lemonade and Really Twisted Tea merchandise.
Laborious seltzers have been positively the product of the 12 months for the Boston Beer Firm with FY2020 gross sales projected to develop 180%-200% and accounting for almost all of firm’s gross sales development this 12 months.
The expansion posted by the Boston Beer Firm was generously rewarded by the traders because the share price gained 130% y-o-y.
Really Laborious Seltzer and Twisted Tea is Booming
The Boston Beer Firm doesn’t disclose it is income data for explicit segments. In its 2019 annual report the corporate makes no segmentation between its merchandise:
The Firm’s beers, onerous seltzers and onerous cider are offered by the Firm’s gross sales drive to the identical forms of clients and drinkers in related measurement portions, at related price points and thru considerably the identical channels of distribution. These drinks are manufactured utilizing related manufacturing processes, have comparable alcohol content material and customarily fall throughout the similar regulatory setting.
As the corporate deliberate its growth in onerous seltzer class, there is a point out in SAM’s annual report that whereas onerous seltzer comprised roughly 3% of United States beer consumption, the section posted 250% development in 2019. Judging from Dave Burwick’s, CEO, remark in July 2020, SAM’s onerous seltzers accounted for about 3% of whole beer quantity at the start of the 12 months. This quantity may go as much as 10% of whole gross sales quantity or $260m in annual gross sales, if administration’s expectation of as much as 200% development this 12 months materialize. If we assume that in 2021 the Boston Beer the section is about to ship 100% development, as introduced by the administration, the Boston Beer firm may obtain $520m in onerous seltzer revenues in 2021.
Curiously, the estimated onerous seltzer share of 10% of whole beer quantity on the Boston Beer Firm resonates with the 10% share of onerous seltzers in response to the Buzzworthy report primarily based on Nielsen information from September 22, 2020. It means that Really is rising consistent with competitors. SAM’s onerous seltzer manufacturers are usually not the one ones within the section. The principle competitor’s embrace White Claw, Bud Gentle Seltzer (BUD), Smirnoff Spiked Glowing Seltzer, Corona Seltzer and Bon & Viv Seltzer to call a couple of. In case you are occupied with shopper notion of a few of them you’ll be able to test this style take a look at.
Along with the present gamers, Coca-Cola’s (KO) CEO James Quincey has introduced in September 2020 that the corporate will enter the onerous seltzer market within the first half of 2021.
SAM compared to BUD, Ambev and the Coca-Cola
Because the Coca-Cola’s CEO has introduced firm’s entry into the onerous seltzer section, we thought it applicable to match the profitability of the Boston Beer Firm and different beer corporations and that of the Coca-Cola Co..
As you’ll be able to see from the Chart under, Coca-Cola Co. has each the best gross revenue and web revenue margin. Boston Beer Co. cuts fairly effectively for beer corporations (we have now excluded Molson Coors (TAP), which might be an outlier on the backside of chart for each classes). Nevertheless, SAM’s profitability is under that for the Coca-Cola Firm.
The administration of the Boston Beer Firm has reiterated its willingness to forsake short-term earnings for the long-term investments into development. As a way to use momentum, the corporate outsourced a number of the manufacturing to the third-party breweries, which had a unfavorable impression on gross revenue margin.
You’ll be able to argue that with 35% income development this 12 months, in comparison with -13.5% for the Coca-Cola Co., SAM has way more development potential. That is why with a purpose to account for an additional 12 months of projected extraordinary development for the Boston Beer Co. we took analysts’ estimates for 2021 for our relative valuation.
Relative Valuation of the Boston Beer Co. vs. the Coca-Cola Co.
The Boston Beer firm is predicted to ship $15.27 for FY2020, barely above administration’s steerage of $15 per share. For 2021 EPS are anticipated to leap one other 55% to $23.63. The sturdy development in EPS relies on the expectation that the Boston Beer Firm is ready to repeat its 35% income development from 2020 additionally in 2021. That is consistent with SAM administration’s steerage of 35%-45% quantity development as introduced through the Q3 earnings name.
The Coca-Cola Co. however, is projected to develop its EPS solely 11% to $2.11 on the again of 10.7% development in revenues in 2021.
On the present valuation KO is costs at 25x P/E 2021 and 6.2x P/Gross sales 2021. Assuming that Boston Beer Co. will have the ability to meet analysts’ expectations for 2020 and 2021, SAM’s shares are presently priced at 38x P/E 2021 and 4.6x P/Gross sales 2021. Ought to SAM’s share price revert to Coca Cola’s 2021 P/E valuation, it will lead to a share price drop to $590/share. The corporate’s share price was at this stage the final time in July 2020, earlier than the corporate has introduced its outcomes for Q2 2020.
As for the P/Gross sales valuation, SAM is buying and selling under KO, nonetheless, as each are mature corporations (and ship earnings), we don’t deem price/Gross sales to be an applicable valuation a number of. If the P/S a number of is telling us, it’s that Coca Cola will get extra for its shareholders per unit of gross sales as a result of it delivers extra in web revenue per unit of gross sales.
We additionally seemed on the relative valuation of different beer corporations. Nevertheless, they’re presently buying and selling at decrease 2021 P/E multiples, because of the unfavorable development because the onset of COVID-19. Due to this fact, we consider that because of the mixture of its superior profitability and decrease development, the Coca-Cola firm presents probably the most related relative valuation benchmark for the Boston Beer Firm. And even with this, the valuation SAM’s shares look like 33% overvalued.
The Boston Beer Firm was positively a winner in 2020, tapping into the newly found market of onerous seltzers with its Really model which have obtained an enormous optimistic reception and is predicted to ship 180% to 200% in FY 2020 quantity development.
SAM’s earnings per share are anticipated to extend 65% from $9.Three in 2019 to estimated $15.Three in 2020. Analysts estimate one other 55% development to 23.6 in 2021 EPS. On the similar time SAM’s share price has jumped 120% from $410 in February 2020 to $900 in November 2020, which in our view overcompensated firm’s development and profitability prospects.
In our view, because the competitors is intensifying within the onerous seltzer section, whereas the on-premise gross sales stay on maintain, the present SAM share price just isn’t justified. Primarily based on the relative valuation we estimate the justifiable share price at round $600/share, which ends up in 33% draw back to the present share price.
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Disclosure: I/we have now no positions in any stocks talked about, and no plans to provoke any positions throughout the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.