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Boston Beer (SAM) Up 44% in 6 Months: Will Momentum Sustain?

Zacks Equity Research

The Boston Beer Company, Inc. SAM is gaining momentum on the back of its focus on the growth plan, including cost savings, long-term innovation, and the revival of Samuel Adams and Angry Orchard brands. Also, the company is witnessing strong shipments and depletion growth.

All these factors helped the company to deliver robust second-quarter 2019 results, wherein earnings and sales outpaced the Zacks Consensus Estimate and grew year over year. Notably, this marked the company’s fourth straight earnings beat, with positive sales surprise in three of the last four quarters. As a result, management raised its 2019 guidance for earnings, shipments and depletions. (Read: Boston Beer Beats on Q2 Earnings & Revenues, Ups View)

We note that, shares of this Boston, MA-based company have gained approximately 44% in the past six months, outpacing the industry’s growth of 5.4%.

Further, analysts are steadily growing bullish on the stock. This is apparent from the rise in earnings estimates. The Zacks Consensus Estimate for the current and next financial year has moved north by 34 cents and 36 cents to $8.93 and $10.09, respectively.

All said, let’s take a closer look at the aspects driving this Zacks Rank #2 (Buy) stock.

Factors Narrating Boston Beer’s Growth Story

Boston Beer has been witnessing sturdy depletion growth for a while now, which is aiding the top-line performance. In second-quarter 2019, revenues grew 16.61% on 17% improvement in shipments and depletions. Depletions benefited from major innovations, quality of products and strong brands alongside solid sales execution and support from distributors. Moreover, strength in Truly Hard Seltzer and Twisted Tea brands aided depletion growth, which was partly offset by fall in the Samuel Adams and Angry Orchard brands.

Management updated its guidance for 2019 primarily due to the inclusion of the Dogfish Head business and robust trends witnessed for the Truly brand in the first half, which aided depletions growth. Including Dogfish Head acquisition, the company now estimates shipments and depletion growth of 17-22%, up from 10-15% stated earlier. Excluding this, shipments and depletions growth are expected to be 13-18%.

Also, the company expects to consolidate the Dogfish Head into its financial results starting Jul 3, 2019. In the second half of 2019, Dogfish Head is anticipated to contribute about 3-4% in Boston Beer’s annual shipments and depletions growth. Further, it is likely to add about $50-$60 million in the company’s net revenues, with gross margin of roughly 50%. It expects Dogfish Head’s operating expenses to be $20-$25 million in the second half of 2019, including transaction-related costs and other non-recurring expenses of about $8 million, of which $1.5 million were spent in the first half. Excluding these costs, the Dogfish Head merger is likely to be neutral to slightly accretive to Boston Beer’s earnings per share in 2019.

For 2019, the company envisions adjusted earnings per share of $8.30-$9.30, up from $8.00-$9.00 mentioned earlier.

Apart from these, Boston Beer remains committed to the three-point growth plan, which is focused on the revival of its Samuel Adams and Angry Orchard brands, cost-saving initiatives, and long-term innovation. Firstly, it plans to revive the Samuel Adams brand through packaging, innovation, promotion and brand communication initiatives. Further, it remains keen on retaining Angry Orchard and Twisted Tea’s momentum while ensuring Truly Spiked & Sparkling's leadership position in the hard sparkling-water category. Secondly, the company is focused on accelerated cost savings and efficiency projects with savings directed for further brand development. As a result, it continues to anticipate improvement in the gross margin by one percentage point every year through 2019. Its third priority is long-term innovation and maximizing the shareholder value. Boston Beer remains optimistic about the future of craft beer and cider categories.

Wrapping Up

However, higher operating expenses and lower gross margin due to increased processing costs at third-party breweries are partly denting earnings growth. In the second quarter, the company’s gross margin contracted 210 basis points (bps) due to elevated processing costs stemming from increased production at third-party breweries and higher temporary labor at company-owned breweries to maintain increased variety pack volume.

Although, the company raised depletions view, it notes that increased volumes for the brands are attracting higher costs due to the use of third-party breweries, which is likely to hurt its gross margin in 2019. It anticipates gross margin of 50-51%. Moreover, softness in the Samuel Adams brand also remains a major headwind.

Nevertheless, we expect the aforementioned growth drivers to offset these hurdles and help the Boston Beer stock to sustain its solid momentum.

Want Other Top-Ranked Beverage Stocks? Check These

PepsiCo Inc. PEP, with a long-term earnings growth rate of 7%, currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Anheuser-Busch InBev SA/NV BUD has a long-term earnings growth rate of 9.1% and carries a Zacks Rank #2 at present.

Brown-Forman Corporation BF.B pulled off a positive earnings surprise of 6.9% in the last reported quarter. The company currently carries a Zacks Rank of 2.

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