It’s been a terrible start to the year for the Brewers industry group on balance, with the index down significantly year to date, with its two main constituents Anheuser-Busch (BUD) and Molson Coors (TAP) putting up lifeless returns, down over 20%. Fortunately, for Boston Beer (SAM) investors, the company has found a way to thrive in the current environment, as the company’s newer Truly and Twisted Tea brands have continued to gain traction among consumers. However, while the company’s growth metrics are outstanding, the stock is beginning to get a little expensive at over 7.2x sales. Therefore, while this growth story could have a longer runway over the next 18 months, I believe investors would be wise not to chase the stock above $895.00.
Boston Beer released its Q2 results last month, and the company delivered yet another blow-out quarter, with quarterly earnings per share [EPS] up 116% year over year, with revenues growing 42% in the same period. The outstanding operating results were attributed to continued acceleration in the company’s newest brands (Truly, Twisted Tea, and Dogfish Head), offset by softer performance in Boston Beer’s Sam Adams and Angry Orchard brands due to on-premise closures. Boston Beer noted that Truly was the only hard seltzer introduced prior to this year to grow its market share in 2020, showing just how resilient the brand is to competing products entering the space.
The most incredible part about the recent results is the massive outperformance vs. peers. While Anheuser-Busch and Molson Coors saw sales decline 19% year over year on average last quarter, Boston Beer grew sales by 42%, an outperformance of 6,000 basis points in Q2. This was driven by the shift we see from the beer and wine categories into hard seltzer, as many consumers are reaching for a refreshing way to beat the heat without packing in calories. Given that Truly offers consumers a 100-calorie option with 2 grams of carbs, 1 gram of sugar, and gluten-free, the product’s leadership and continued growth aren’t surprising. As the chart below shows, despite new entrants into the hard seltzer space, Truly and White Claw are the two continuing to grow market share. At the same time, Anheuser’s Bon & Viv and other offerings (orange and red-shaded areas) haven’t been able to gain much traction.
(Source: Nielsen, Guggenheim Securities LLC)
Circling back to Boston Beer’s legacy brands, it’s worth noting that, while Sam Adams and Angry Orchard should see negative growth in FY2020, they are actually growing at double-digit levels off-premise. However, the on-premise closures with restaurants, bars, and events seeing much less traffic have held these brands down. If we look 12 months ahead, where the market is generally the most focused when valuing stocks, it’s easy to see why funds are piling into Boston Beer at such a rapid pace. This is because the company’s Truly brand continues to have a chokehold on the hard seltzer market, and we should see on-premise sales head back to normal levels within the next 12 months as things reopen. With Truly continuing to gain market share and taking a bite out of beer demand and on-premise opening back up, we have a company capable of generating over $2 billion in sales in FY2021. Let’s take a look at the company’s growth metrics below:
(Source: YCharts.com, Author’s Chart)
As we can see from the chart above, Boston Beer has seen a massive acceleration in its earnings, after years of stagnant growth between FY2014 and FY2018. During FY2018, the company saw an earnings breakout year with annual earnings per share [EPS] hitting a new all-time high, and FY2019 saw a very respectable growth rate of 16% ($8.69 vs. $7.46). However, it’s FY2020 where the real impressive growth shows up, with earnings increasing due to a surge in revenues due to much higher shipments year over year. If we look at the FY2020 estimates, we can see that they’re currently sitting at $12.85, with FY2021 estimates recently ratcheted up to $16.90.
(Source: Author’s Chart)
Assuming Boston Beer meets its FY2020 estimates, this would translate to a 48% growth rate in annual EPS year over year, a 3,200 basis point acceleration in earnings growth year over year. This is incredible growth for a non-tech company, especially considering that the industry group is expected to post negative growth year over year; both Anheuser-Busch and Molson Coors expected to see annual EPS decline by at least 20%. It’s worth noting that this incredible earnings growth is occurring despite margin compression as the company has been using third-party brewers to help fill some orders due to capacity issues related to COVID-19. Looking ahead to FY2021, Boston Beer should maintain its high double-digit growth rates, with forecasts currently looking for 31% growth ($16.90 vs. $12.85).
(Source: YCharts.com, Author’s Chart)
If we move over to Boston Beer’s quarterly revenues, the growth is incredible for an industry that’s generally been relegated to single-digit growth rates. As we can see, Boston Beer grew its quarterly revenue from $306.9 million to $378.5 million from Q3 2018 to Q4 2018, and early estimates suggest we could see Q3 2020 revenue launch to $511.6 million. This would translate to 35% revenue growth year over year, after lapping 23% revenue growth in the prior year. If we look ahead to Q4 2020 estimates, revenues are forecasted to grow by 29% year over year, a slight deceleration sequentially, but still a very impressive growth rate.
(Source: YCharts.com, Author’s Chart)
So, why not buy Boston Beer at $890.00 if the stock is a leader by a wide margin in its industry, and the company has a dominant position with the leading product in the hard seltzer space? Unfortunately, the value is beginning to get a bit ahead of itself, with Boston Beer currently valued at 7.3x sales. This is a hefty price to pay for any non-tech growth stock, and even one with 30% plus revenue growth rates, unless Boston Beer plans on growing at this pace indefinitely. As we can see, Boston Beer trades at three times the multiple of Anheuser-Busch and more than seven times the multiple of Molson Coors, suggesting that it’s well ahead of its industry group from a valuation standpoint. However, there’s one caveat worth pointing out here.
As we can see below, Molson Coors and Anheuser-Busch are seeing double-digit declines in revenue growth, while Boston Beer is growing revenues at over 30% year over year. Therefore, we would expect Boston Beer to trade at a massive premium to these two names. Having said that, this premium is becoming a little stretched, and Boston Beer is now trading at the highest level for a brewer in the past three decades, even when Molson and Anheuser-Busch saw solid growth.
If we look at the chart above spanning back to the 1980s, we can see that the peak valuation for Anheuser-Busch was 5.3x sales just over four years ago, and the peak valuation for Molson Coors was 6.7x sales. Since then, these stocks have been dead money, and the large spikes over the past three decades in their revenue multiples have typically led to significant mean reversion in their share price. Currently, Boston Beer is trading at 7.3x sales, which is above peak valuations for both companies in their prime, suggesting that it’s getting a little stretched.
Even if we were to apply a 20% premium to Boston Beer as it’s entering a new category and clawing away market share from its peers, the valuation is still quite lofty. This is because the average peak revenue multiple for Anheuser-Busch and Molson Coors was 6.0, and Boston Beer has now fully priced in that valuation at 7.3 (6.0 x 1.2 for 20% premium = 7.2). While this doesn’t mean that Boston Beer needs to correct significantly, it does suggest that there’s no real margin of safety baked in here for new stock purchases at current levels.
Unfortunately, while the valuation is getting stretched, the technical picture confirms this, with Boston Beer currently more than 50% above its weekly moving average. As we can see from the weekly chart looking back to 2013, these over-extensions have always led to 15-20% declines in the share price. Given that we are currently much more stretched than all prior occasions, I believe investors are taking on elevated risk if they’re considering purchasing the stock above $895.00. While the above chart does not mean that we have to correct 15-20% like all prior occasions, I think the best case from here is a sideways consolidation in the $800.00 – $920.00 range to allow the valuation to play catch-up. The more likely case, in my opinion, is a correction to reset the current overbought condition.
Boston Beer is undoubtedly an exceptional growth story that had the foresight to venture into an area of the market that’s allowed it to take a bite out of its competitors, while they’re most vulnerable with on-premise sales mostly shuttered. However, while growth at a reasonable price is a recipe for outsized portfolio returns, growth at an unreasonable price is a lousy recipe altogether, especially when mixed with a hint of an overbought condition.
Therefore, while Boston Beer is a tremendous growth stock, I believe investors would be wise not to chase the stock above $895.00. In fact, if we were to see a rally above $910.00 before October, I believe this would be an opportunity to take profits on the stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.