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Stock Strategist

Boston Beer Company Has Growth Potential on Tap

Shares of this narrow-moat company are trading at a discount to our fair value estimate.

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Shares of narrow-moat  Boston Beer (SAM) now trade at a substantial discount to our $175 fair value estimate, owing to recent market share challenges in the firm's craft beer and cider portfolio and deleveraged costs that have harmed profitability. Admittedly, we agree that Boston's Sam Adams and Angry Orchard beer and cider brands will continue to grow more slowly than the overall craft industry, owing to competition from both small local brewers and mega beer conglomerates. But we believe the market is missing the firm's longer-term opportunity to reduce bloated costs, improve brewery efficiency, and reinvest in product and marketing initiatives that should help to drive improved results versus a challenging 2016.

The firm's volume has fallen 5% in the year to date, but we believe the worst is likely behind Sam Adams because of strong end-market growth, planned marketing and brand investment, and easier comparisons going forward. We also remain confident of the long-term potential for the cider category, given its low penetration in the United States relative to other developed countries, and are encouraged that Angry Orchard has held market share. Altogether, we expect craft beer and cider to continue climbing as a percentage of the overall U.S. beer market (to about 23% and 2%, respectively, by 2020, from an estimated 13% and 1% in 2015) as consumers continue to flock to these products, providing a solid backdrop for Boston Beer to increase volumes. Although we expect volumes to decline about 3% for full-year 2016, we forecast positive mid-single-digit volume gains past this year as the firm's products outpace the larger beer market.

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