Better Buys on Tap
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are a beer drinker, there is a good chance you have heard of Sam Adams. The company behind Sam Adams is Boston Beer (NYSE: SAM), and to say that the market has downed one too many would be too kind. Since I have family from New England I'm naturally a fan of Boston Beer, but the stock market is acting like this company is the equivalent of the championship Celtics teams of old. The Celtics were great and won many championships, but at current prices Boston Beer is priced so highly that even Bill Russell or Larry Bird couldn't make this one a winner.
Boston Beer recently reported earnings and it's not that the company is doing badly. This is simply a case (pun intended) of the market expecting far too much at the current time. The beer business is pretty simple to understand, which is probably why so many people are gravitating to Boston Beer's stock. A brewer's business is to make a quality product, continue to introduce new flavors and concepts, and charge a fair price. Sam Adams does all of these things, but their competition offers quality products as well. That's really the crux of the issue with Boston Beer, they are a great company, but the stock is selling for much too high a price. Take a look at the relative merits of investing in Boston Beer versus two of their major competitors. We will use Molson Coors (NYSE: TAP) and Anheuser-Busch InBev (NYSE: BUD) since these companies are some of the top players in the industry.
You can clearly see that Boston Beer is the most expensive of the three. The company's lack of a dividend, also puts investors at a relative disadvantage. While some might say that Boston Beer has a history of beating earnings, I would counter that so do Anheuser-Busch and Molson Coors. Let's take a look at Boston Beer's last earnings release to get an idea of what investors can realistically expect from this brewer.
In their earnings report dated 8/1, Boston Beer showed revenue up 10% on core shipment growth of 7%. This is both realistic and probably what investors should expect in the future. The company returned some cash to shareholders through a share buyback of 74,000 shares priced at an average of $102.70. This will help long-term earnings growth, but unlike a dividend doesn't put the funds directly in shareholder's pockets. The company also reported a strong gross margin of 54.5%. This was impressive because out of their previously mentioned competitors, only Anheuser-Busch reported a better gross margin at 57.4% versus Molson Coors at 41.96%. When a relatively small company can report almost as high of a gross margin as a much larger, more established competitor, you know the company has pricing power.
What Boston Beer does not have, is the growth to justify their current price. The company set expectations that their depletions would run between 8% and 12% and EPS should come in between $3.80 and $4.20 per share. Considering that analysts are still calling for full year earnings of $4.15 per share, the company will need to hit the high end of their guidance to avoid a negative surprise. Between the stock's high valuation, slower growth, and non-existent dividend I would suggest investors look elsewhere. The company they should likely look to is Anheuser-Busch.
Anheuser-Busch looks like one of the best values for investors in the industry. The company's expected earnings growth exceeds both Boston Beer and Molson Coors by a fair margin. The company has the highest gross margin of the three, and pays a dividend. I know that some investors would suggest that Molson Coors' dividend is a reason to go with that stock, but Anheuser-Busch has increased its dividend substantially over the last few years and that should continue. In fact, the company has more than tripled its dividend in the last three years, and today only pays out 34% of its free cash flow. If you add it all up, investors could get nearly 13% earnings growth, a 1.5% dividend, and the chance for big dividend increases. I would suggest investors do their own research and see if they should open a bottle of Bud and watch the returns pour in.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer and Molson Coors Brewing Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.