This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.
Boston Beer Co - a founder-led business down on its luck
Today, from rainy Sydney, we touch on a founder-led business in US that was caught up in a “meme-stock” style sell-off; Boston Beer Company (NYSE:SAM). For those who have never heard of them, they own Samuel Adams, Truly Hard Seltzer, Twisted Tea, Angry Orchard, and some smaller labels. And well, things have not been going well for our friends at Boston Beer Co & it is unlikely to end soon…
Their stock rose to +$1,300 in April’21 and tanked to $514 on Friday’s close. To add salt to the wound - they are being investigated for securities fraud allegations. The share tumble could be attributed to:
An unexpected deceleration in the growth in hard seltzers in US
A material deterioration in earnings forecast (the communication of which was not well managed by the company)
In Jun’21 they reduced EPS forecast to $18-22/share from $22-26/share
In Sep’21 management entirely removed their guidance completely
So, when do you catch a falling stock?
Currently, the average US Beverage multiple is 32x P/E (crazy hey!) so if Boston Beer generates consensus EPS of $17.5/share; it is trading barely under the average multiple at these new lows.
But more importantly – who pays 30x for a beverage company when you can buy Apple for a similar multiple?
Given the securities fraud case (and the company launching its own lawsuit against NY distributors) I would not be surprised if the stock continues to slide lower. In fact, it would not surprise me at all if the share price fell well below $500.
Even at that point, it is still not ‘cheap’ per se (c.28x P/E). However, let me explain what is interesting/special about this company and why it deserves a spot on your watchlist… even if the likelihood of short-term price decline is very high.
Insofar as being founder-led, Boston Beer Co is very linked to its founder
Boston Beer Co. was founded by Jim Koch, one of the early craft brewers, and he possesses the usual charisma you would expect in an entrepreneur. After all, if he sells $2bn of drinks a year… of course he’s going to sell you on his ability to grow Boston Beer Co!
While Koch is no longer CEO, he's Chairman, he owns c.20% of the company and is very influential. So much so that “key man risk” appears in all their annual reports. Importantly, and somewhat concerningly for investors, Koch holds 100% of the company's Class B stock (giving him specific voting rights). This means that the election of the directors and other matters requiring stockholder approval are decided by Koch. Whilst his incentives are aligned, it is difficult for the board to make material decisions without him.
Personally, I don't find dual-class shares for founders to be a deal-breaker, they are common in Facebook and Snapchat, however, investors need to be aware that it can make takeovers or director removal harder
The reason why I think having Koch at the helm is good is that they have been very willing to experiment with new products and pivot their product offering. To quantify this you only need to look at how product mix has changed in the last 5 yrs - almost completely phasing out their flagship Samuel Adams beer
Ok - so what about their Seltzer game
Despite Boston Beer inventing the first seltzer, White Claw (a competitor) was most aggressive in launching a seltzer and are the product leader in the category (and their Truly brand is 2nd). As shown below, Truly is desperately trying to take back a share in this maturing market.
In terms of growth rates, my guess is that seltzers will stagnate at c.10-15% of the total beverage market and Truly will grow at +10% in the near term. Sure, a survey of better-informed liquor distributors suggests it will be +20% growth, however, it is wise to trim this given the seltzer product is "in vogue" at the moment.
Unsurprisingly, the thing that favours the seltzer market is that its low calories and recency makes it popular in both men/women and younger drinkers. Also - its mid-range ABV/alcohol- means the average drinker consumes if more regularly than hard spirits. Whilst I imagine that Truly will stay 2nd to White Claw they are likely to have a meaningful share of 25-30% and heaps of new entrants will disappear.
What about SAM's other products
Given that these are not as big of a driver, I will whiz over these (happy to go into further detail if requested)
Twisted Tea - c.26% of sales
I think this product range could grow at rates marginally slower than seltzer from today onwards (e.g. +10%). The reason is simple - they have great product turnover rates but despite that, most wholesales are still selling products with lower turnovers.
Samuel Adams & Dogfish Head- c.15% of sales: Like in a lot of countries, the craft brew scene is super crowded. It is fair to say that these products will have no growth (or slightly negative growth)
Angry Orchard <5% of sales: Whilst they are a meaningful player in craft ciders, most people buy mainstream ciders so it is not worth digging into
So where do we sit valuation wise?
This one is quite hard because the Boston Beer Co. has a great track record of innovating new products, however, how can you possible bake this in until they exist...
As flagged above, the market is still assuming the seltzer demand grows quite materially and that a decent multiple can be justified. I am more sceptical and built out lower growth
Modelling this out, the returns are only desirable if you have certainty of the entry/exit multiple staying constant. This is naturally easier at 25x P/E than 30x.
Gross margins are already enviable at +45% and whilst salary/advertising costs are well managed these are generally one-third of sales
It is unlikely they will improve their working capital from the current level (c.17days)
Finally - I have not assumed any share repurchases, however, these are likely given the cash flows generation and limited gearing
So in short; this is the type of growth profile I can envisage for Boston Beer Co
In conclusion - this is where valuations are inevitable flawed/difficult. It is very hard to know what kind of new products Boston Beer Co will continue to reinvent as seltzers wind-off, and without seeing these new innovations, it is difficult to not assume multiples compress from current highs 30x.
This being said, a founder-led business with strong consumer tailwinds and a failing share price is always worth watching closely.
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