Can Boston Beer Maintain Its Growth?

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sam Adams maker Boston Beer (NYSE: SAM) achieved great results last quarter, driven by seasonal beers and Angry Orchard hard cider, reported Duane D. Stanford at Bloomberg. This beer company seems like it's found a great premium niche with higher priced, better tasting brews. Nevertheless, some investors remain concerned about Boston Beer's valuation, wondering if this beer company can maintain the growth that supports its current high price.

Earnings Growth

As a growth stock, Boston Beer's 2.95 PEG ratio immediately stands out. An investment in Boston Beer relies on the argument that analysts significantly underestimated this beer company's growth potential. Boston Beer's long term earnings growth history provides some support for this argument, as the company achieved a five year EPS growth rate of 39.4%. With a trailing P/E of 29.5, if analysts expected Boston Beer to maintain this earnings growth rate, it would have a PEG of 0.75. Boston Beer's 27.3% earnings growth this quarter was lower than this long term average, but it's still a very impressive figure.

Bear Case

The analysts may have looked at Boston Beer's five year revenue growth of 10.1%. Even if a company made some efficiency adjustments that boosted profits in the past, it could still be difficult for its earnings growth to significantly surpass its sales growth in future years. A 30 P/E and 10% expected income growth would produce a PEG ratio of 3, indicating overvaluation. The beer company did report 23.5% higher sales this quarter, though, so its long term revenue growth might also beat the bears' expectations, especially with newer products like Angry Orchard performing well. Short sellers held 39.3% of Boston Beer's float on Nov. 30, 2012, although this figure probably dropped quite a bit after the brewer's latest earnings report.

Market Trends

Investors wonder whether Boston Beer can take market share from traditional brewers. Sales of several mainstream beer brands have fallen recently. A Marketwatch slide show lists Anheuser-Busch InBev's (NYSE: BUD) Michelob as the brand that suffered the sharpest drop, and lists SABMiller plc's (NASDAQOTH: SBMRY) Milwaukee's Best and Miller Genuine Draft as brands that experienced sales declines as well. The craft beer trend looks like it's still ongoing.

The Competition

The current price of Craft Brew Alliance (NASDAQ: BREW) shares suggests that investors will pay a premium to invest in craft and upscale beer right now. The Craft Brew Alliance currently has a trailing P/E of 50.9 and a forward P/E of 31.5, with no PEG listed on Yahoo! Finance. This company's five year revenue growth of 29.7% beats Boston Beer's figure resoundingly, but its 13.3% revenue growth over the past year comes out closer to Boston Beer's 10.6% revenue growth over the period.

Anheuser-Busch and SABMiller are both large, mature companies, so a direct comparison based on valuation wouldn't provide much utility. These companies' earnings and revenue figures do provide some information about current trends in the beer industry, though. SABMiller achieved 15.1% income growth last quarter on 5% higher sales, while Anheuser-Busch reported 15.6% higher income for the quarter on 0.5% higher sales. These figures could mean that beer companies have the pricing power to generate rising profits right now even without strong revenue gains, and Boston Beer might have an even greater opportunity to take advantage of this trend with Sam Adams and Angry Orchard.

Takeaway

Boston Beer's recent results provide valid reasons to revise long term estimates about the company's performance. The company's history of around 10% annual sales growth would not have justified its current price. With the addition of a popular new product that provided a significant boost to sales this year, the company has demonstrated higher growth potential and the previous PEG estimates no longer look valid. Boston Beer still looks like it's selling at a premium, but it isn't dramatically overvalued like the short sellers believe.


enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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