The Boston Beer: Sell-Off May Be Overreaction, Look At Valuation (2024)

Thesis

The Boston Beer Company (NYSE:SAM) is a prominent name in the alcoholic beverages industry and boasts several flagship brands and products. This article, however, will be predominantly focused on the Hard Seltzer category of its products under the ‘Truly’ brand name. This is because most of the share price volatility relating to SAM during the year is revolving around a major inventory write-off pertaining to a gross overestimation of over $100 million by the management with regard to the sale of Truly Hard Seltzer.

The product is still showing growth in the market but at a slower pace than expected and the management has duly revised their plans & strategies for the upcoming year, taking new figures into account. The overall impact of the write-off is one-off in nature and doesn’t necessarily reflect poorly upon the fundamental financial strength of the company or gross incompetence by the management to indicate a future decline in the company’s future value.

The sell-off may have been an overreaction given the circ*mstances and a lawsuit, and upon release of further, more promising figures, SAM could work out as a contrarian play.

Company Overview

The Boston Beer Company is one of the largest craft beer companies in the world that markets and sells its products internationally to wholesalers, importers, and other parties. Their brand library includes Angry Orchard Hard Cider, Twisted Tea, Truly Hard Seltzer, Wild Leaf Hard Tea, Tura Alcoholic Kombucha, and other craft beer brands such as Angel City Brewery, Coney Island Brewing, Concrete Beach Brewery, Dogfish Head, and Craft Brewery. The company has a total market share of approximately 8.56 % with a market cap of $5.7 billion.

SAM’s Share Value Decline & ‘Truly’ Hard Seltzer

Hard Seltzer sales went to $5 billion in 2019 from about $2 billion in 2018 and the market increased by 73% between spring & fall 2019. Subsequently, the market saw $4.5 billion in sales from May 2020 to May 2021. According to Statista, revenue in the Hard Seltzer segment amounts to $11.3 billion in 2021 and is expected to grow annually by 36.54% (CAGR 2021-2025). According to NielsenIQ, Truly (Boston Beer) and White Claw (Mark Anthony Brands) hold a strong 75% market share in the hard seltzer category.

Based on these factors, SAM expected the category to grow at over 70% and therefore, built up their inventory to try and avoid any stockouts. However, Sales growth of Hard Seltzers had slowed down to about 30% by July 2021, down from 165% in 2020 (Business Insider) resulting in an inventory write-off of over $102 million (17% of revenue) during 2021 which subsequently translated into a net loss of over $58 million for the company. The company’s earnings fell from $6.51 per share in 2020 to a loss of $4.76 per share.

The Boston Beer company’s founder Jim Koch stated in 2021’s second-quarter earnings call that the hard seltzer category and overall beer industry were softer than they had anticipated; and as a result, SAM’s share price steeply declined by 26%. Within the last six months, SAM’s share price has dropped over 54%, from $1010 in June to $464 in November.

The Lawsuit

Regarding the miscalculation of the seltzer market resulting in a significant one-off loss, shareholders have filed a lawsuit alleging, "Defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company's business, operations, and prospects. Specifically, Defendants failed to disclose to investors: (1) that Boston Beer's hard seltzer sales were decelerating; (2) that, as a result, Boston Beer was reasonably likely to incur inventory write-offs; (3) that the Company was reasonably likely to incur shortfall fees payable to third party brewers; (4) that, as a result of the foregoing, Boston Beer's financial results would be adversely impacted; and (5) that, as a result of the foregoing, Defendants' positive statements about the Company's business, operations, and prospects were materially misleading and/or lacked a reasonable basis."

The deadline has passed for shareholders hoping to be appointed as part of this lawsuit, and it is hard to know for sure whether this will go anywhere. That being said, here are some of the facts about the case, taken from oleantimesherald.com.

On July 22, 2021, after the market closed, Boston Beer reduced its full year 2021 guidance, expecting earnings per share between $18 and $22, down from a prior range of $22 and $26. The Company cited softer-than-expected sales in the hard seltzer category and overall beer industry and also stated that it had "overestimated the growth of the hard seltzer category in the second quarter."

On this news, the Company's share price fell $246.54, or 26%, to close at $701.00 per share on July 23, 2021, on unusually heavy trading volume.

On September 8, 2021, after the market closed, Boston Beer withdrew its 2021 financial guidance, citing decelerating sales of hard seltzer products. The Company also stated that it "expects to incur hard seltzer-related inventory write-offs, shortfall fees payable to 3rd party brewers, and other costs" for the remainder of fiscal 2021.

On this news, the Company's share price fell $21.09, or 3.7%, to close at $538.31 per share on September 9, 2021, on unusually heavy trading volume.

Just from this information, it appears they were honest with shareholders to the degree they are legally obligated to. Once again, however, it would be irresponsible to claim that I can speculate how the case will settle. This does act as a negative catalyst that may be responsible for pushing the stock below fair value.

How did it affect SAM?

The situation may not be as bad as it looks. Truly hard seltzer is still experiencing a growth in sales, just not as much as per the company’s prior expectations. Dave Burwick, SAM’s veteran CEO stated that “While Truly has continued to grow, gain share and solidify its long-term position, the slower category performance has reduced our full-year growth expectations for Truly to be between 20-25% year-over-year.”

After revising its projections for the full year of 2021, the company now expects depletion growth to be between 18% and 22% and 2021 gross margins to be between 40% and 42% for the whole year. The company also expects to increase its prices by 3 to 6 percent during 2022 in lieu of inflationary factors surrounding the input costs, which will aid in driving up the revenue.

If we consider the trailing 12 months of data, then the company’s revenue comes up to $2,170 million with a net profit of 99 million (4.57% Net Margin) despite a currently recorded obsolescence associated charge of $95 million which goes completely in line with the aforementioned estimates.

Intrinsic Value of SAM stock (DCF Valuation)

The one-time write-off of company inventory is not representative of SAM’s core business value or fundamental financial health, but still had a major impact on the company’s stock price. Let’s dive a little deeper to look closely at the company’s financial health.

A Discounted Cash Flow (DCF) analysis to ascertain the intrinsic value of SAM shows that the stock is undervalued by about 12.5% of its current value. The current share price is set at $464.75, however, the model extrapolates that the share price as a representation of all its future cash flows should be $523 right now.

There are a lot of factors that significantly impact the results of a DCF model, and we must consider each factor very carefully to extrapolate reasonable and justifiable outcomes such as the discount factor and estimates of future cash flows, etc. It should also be noted that the no model alone can provide a 100% accurate picture they cannot incorporate all factors that may affect a company’s financial position or predict future cash flows, CAPEX requirements, etc. with complete certainty.

I have used the capital asset pricing model (CAPM) for calculating the Cost of Equity for SAM which comes up to be 6.98% (Risk-free Rate 1.56% + Beta 0.7 + Equity Risk Premium 4.72%) while the future cash flows have been estimated based on expert analyst estimates for 2022 and 2023, there onwards, following a growth trend that starts with 20% growth in 2024 (median growth for the trailing 12 months of September 30^th for the previous 5 years) and slows down 25% per annum to represent real numbers. (All cash flows represented in millions)

Source: Author Calculations

I have avoided using alternative methods of valuation in this article as the P/E ratio, P/S ratio, P/B ratio, and such ratios will need to be adjusted by amending the figures quite a lot because the current state of flux has been stirred up by obsolete inventory and its associated charges and tax benefits, etc. For instance, the PEG ratio of the company currently stands at 6.01, whereas the historical median is significantly lower at 1.66. Therefore, they will provide a much less accurate picture than the above-used model if used in their current standing and won’t be a fair measure for future projections.

Financial Position

SAM has had a rough time during the 2^nd half of 2021 in terms of the stock price as it fell from an all-time high of over $1,300 to the current price of $465. Apart from that, the company is debt-free and has substantially higher than industry-average financial strength ratios.

The takeaway

The fundamental strength of the company should be strong enough to endure through this rough patch to come out with a rebound and gain a significant chunk of its value by 2023. The company’s future will get much clearer upon the release of 2021 annual reports, which, if shown the estimated results, will return the investor confidence in the stock. Consequently, pushing the share price upwards through the first quarter of next year.

Due to investor uncertainty regarding the lawsuit and the lack of a significant margin of safety, I am assigning a neutral rating to the stock for the short term and would like to see the stock fall further before taking a position. That being said, make sure to watch the company's annual report to re-evaluate. If the results calm investor uncertainty and offset inventory losses, SAM may work out as a contrarian play.

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