Stock Puzzle: Boston Beer Company

If you like puzzles, here’s one I looked into lately. What in the world is going on with Boston Beer Company SAM?

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Check out Morningstar’s Key Ratios for SAM.

Shares out decreasing, ROC and net margins high and increasing, working capital the same in 2011 as in 2002 despite sales having more than doubled. Heavy insider ownership (via B shares).

Why aren’t AB Inbev and MillerCoors driving this tiny player out of business? Why hasn’t it been bought out already if it’s such a great company? How does a small player like SAM make such high ROCs in a commodity business? Shouldn’t they just barely be profitable?! Especially since beer sales in the US have been doing this:

I think I eventually pieced it together. Regardless it’s a fun piece of detective work. Their 10-K is one of the easiest to comprehend of all I’ve looked at. Perfect to read over a Sam Adams.

Can you figure it out? What price would you pay? Disclosures: none.

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UPDATE: 10/28/2012
OK, I guess I’ll call time.

While US beer consumption as a whole has been declining, so-called “better beer” (premium ingredients and/or imported) and “craft beer” (premium ingredients from small independent brewers) has been increasing for years now with either high single digit or double-digit growth depending on how you measure it (volume or sales).

At this point it looks like there are room for many players. In June of this year, the # of US breweries hit 2126. For perspective, there were only about 250 in 1990, which explains why there was such limited choice while I was in college. The US hasn’t seen this number of breweries since about 1887. Barriers to entry are low and everyone’s looking for a piece of the expanding pie.

Why haven’t the big brewers taken over this market with limited distributor and shelf space? That’s a harder nut to crack, but beer snobs on the web tell tales of them previewing really awesome premium beers in test markets, only to not be able to help themselves and switch to cheaper ingredients when they finally roll things out. Or similar stories such as this. The result is that beer lovers give the new offerings from Big Beer a try once, but go back to their small, independent favorites. Even if the offerings are good, you’re not going to switch entirely to the new Big Beer IPA. It will be one of many you’ll put into your rotating purchases for variety.

As for SAM, they appear to have revolutionized some parts of craft beer operating efficiency, including outsourcing their brewing, which obviously saves costs but also makes the beer fresher in that it brewed closer to where it’s consumed. They have a passion for brewing, trying out 100 different brews last year (some of which ended up going down the drain) and even reporting annual consumption figures of the founder in their 10-K (who incidentally, holds the 35% of the company’s shares that have any voting power).

Time will tell if they can continually deliver such high returns as competition grows. Always remember too, that understated assets can inflate ROA.

Bruce Greenwald would say to do one valuation based on reproduction cost of assets (which is VERY different from liquidation value), and second valuation based on current earnings power to triangulate, but give zero value to growth because there are no barriers to entry. Be careful with earnings power based on trailing earnings though – SAM’s bottom line was recently helped by a one time legal settlement stemming from a 2008 problem with a bottler.

Bottoms up.

5 thoughts on “Stock Puzzle: Boston Beer Company”

  1. Short SAM. They’re priced to perfection. Retailers are getting tired of their constantly changing product. Consumers are tired of them, thus require a new product to keep interest. Their old products aren’t selling well.

  2. completely agree on the price. as for this consumer, while i like some of their beers (latitude 48 ipa), in a supermarket or pub with lots of variety, they would never be my first choice.

    but the question remains: how did they achieve ROICs of 20% in 2009, 30% in 2010, and almost 40% in 2011? those are basically the same returns as Coke, though in a different order.

    thanks for chiming in.

  3. I am really interested in your answer to this, but I think that you already alluded to why ROIC was so high in the last few years for SAM. My guess:
    1) they are getting the source ingredients from smaller farms that value their brewing methods and final product, and in return for SAM purchasing large quantities (bulk) and promoting the source, SAM gets large discounts; 2) SAM has perfected the brewing process, have very high employee allegiance (i.e. low turnover), and don’t need to invest in new equipment/staff; 3) very effective marketing and pricing (competitive); 4) setting up brewing near distribution centers across US; The million plus Bostonians and folks from the NE have a high alliance to locally brewed beers–esp one with such a good reputation as SAM, and boy to we like our beer! 🙂

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