Boston Beer: Wait for the Foam to Settle
The narrow-moat brewer will continue to benefit from the ongoing craft-beer revolution, but the stock's current valuation is heady.
Adam Fleck: We've seen a craft revolution in the U.S. beer industry over the past decade, and we think this trend is going to continue for the foreseeable future owing to strong demographics from the millennial generation primarily. As a result, we think that craft beer will eventually climb to north of 20% of total U.S. beer volume by 2020 from about 11% today. But we think that leading craft brewer Sam Adams, or Boston Beer (SAM), is likely to see slowing growth and continued market share loss owing both to the rise of small local niche producers and continuing marketing investment behind big brands from AB InBev (ABEV) and MillerCoors such as the Goose Island label and Blue Moon.
Outside of beer, Boston Beer has found very strong success in the Angry Orchard hard-cider market; but here, too, we see increasing competition and ultimately slower growth for Boston. Now, slowing revenue growth is not necessarily a bad thing; it should allow management to refocus on increasing operating profitability and free cash flow generation--both of which have lagged in recent years.
Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.