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Increasing Thirst for Craft Brews Should Drive Boston Beer's Earnings Growth

But the Sam Adams maker isn't alone in its quest to serve the market.

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 Boston Beer (SAM) once again delivered excellent quarterly results, as depletions grew 26% versus the year-ago third quarter, and the company slightly raised its outlook for 2013 as well as giving a 2014 forecast that slightly outpaced our prior expectations. Although we have increased our fair value estimate to $160 per share from $150, we still view the stock as expensive. We believe the firm's narrow economic moat is fortified by its strong brands (Samuel Adams, Twisted Tea, and Angry Orchard), but longer-term increased competition from the craft beverages created by MillerCoors (SBMRY)/(TAP) and Anheuser-Busch InBev (BUD), as well as thousands of smaller independent craft brewers, could impede Boston Beer's growth.

Growth in Craft Beer Has Benefits and Risks
While Boston Beer has benefited from nearly two decades of the craft beer category gaining share of stomach, this same growth is fueling some significant risks for the company. As Americans drink fewer premium light beers (such as Miller and Budweiser), the major beer companies have been promoting their own craft beers (such as Blue Moon and Leinenkugel) and hundreds of smaller craft breweries have been popping up, trying to become the next Samuel Adams. This increased competition could lead to irrational pricing. Nonetheless, we believe it is more likely than not that Boston Beer's market share could nearly double over the next decade as the category continues to gain share and the Sam Adams and Angry Orchard brands remain relevant to American drinkers.

Thomas Mullarkey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.