Boston Beer: Time for Last Call

By Chad Henage - January 16, 2012 | Tickers: BUD, SAM, TAP | 0 Comments

• Email
• Print

Boston Beer (NYSE: SAM) is known better by its most famous brand, Sam Adams. Most beer drinkers know Sam Adams; the stock market knows Sam Adams, too, and it's time for Boston Beer stock to get a reality check.

Now let me make it clear I have friends and family in New England and they might not be happy with me for writing negatively about Boston Beer. I don't have a problem with the quality of Boston Beer products, just how much Mr. Market says the company is worth right now.

To see why I have a problem let's compare Boston Beer with Anheuser-Busch (NYSE: BUD) and Molson Coors (NYSE: TAP) to see how it stacks up:

(The PEG+Y ratio is (Earnings Growth + Dividend) / P/E ratio) * 100) This is a shorthand that Peter Lynch describes when comparing dividend and non-dividend paying companies. The higher the number the better. He says 1 is standard, 1.5 is good and 2.0 or better is what he was looking for.)

So using this table you can see some rather large differences. First, Boston Beer pays no dividend, which isn't an issue if it's growing faster by not paying the dividend. Second, Boston Beer's P/E and thus its PEG+Y are both significantly worse than the other two.

So the dividend issue is one to tackle first. If Boston Beer grows faster because of not paying a dividend, that's one thing. However, in this table we can see it's the second-fastest grower in the next five years, according to analysts. I would like to see a dividend if it's only going to post 9% growth.

The P/E ratio is more then double the other two companies, likely because Boston Beer has been growing faster. But we have a problem: in three of the past four quarters, Boston Beer has missed estimates. Granted, it was the most recent quarter in which SAM beat estimates, but one out of four does not a trend make.

The PEG+Y really tells the story. With Boston Beer at 0.37, this tells us that it is valued nearly 3 times more expensively then Anheuser-Busch. I arrive at that because not only is Anheuser selling at a discount in its P/E ratio, it's also expected to grow faster and it pays a 1.6% dividend to boot. Even Molson Coors wins this category because though it's growing slower, it's also selling at a cheaper P/E and has a 2.91% dividend to help returns.

Just a few more things directly from the company's most recent earnings report. Consider the company is predicting "depletions and shipments in the mid to high single digits" and even with an expected "2.5 - 3.5% price increase" still expects gross margins to be between 53%-55%, which would be a 1%-3% decrease in margin for 2012.

So to pay 24 times next year's earnings, you have to expect better than 9% growth, as analysts expect longer term. I don't see how Boston Beer gets there with shipments in the 5%-9% range and a price increase that might still not get gross margins to where they were in the third quarter.

Given that Boston Beer has been a great performer, this might be hard to hear, but even if the company were valued at a 50% premium to Anheuser-Busch based on P/E ratio versus expected growth rate, Boston Beer would only be valued at about $70. Since that's about 30% down from where we are now, I think it's time for last call on this one.

• Email
• Print
• Feedback