Report
Sonia Vora
EUR 850.00 For Business Accounts Only

Morningstar | Hard Seltzer and FMBs Continue to Fuel Boston Beer's First-Quarter Top-Line Expansion; Shares Rich

Narrow-moat Boston Beer's top-line momentum continued in the first quarter, with revenue up 32% (driven by a 32.5% increase in shipment volume) and depletions growing by a double-digit rate for the fourth quarter in a row. This sharp increase in revenue was largely due to timing shipments to ensure distributor inventory levels will be able to support higher volumes in the summer months. As evidence, management estimates average distributor inventory during the quarter stood around six weeks on hand and expects this to return to a normalized level of three to four weeks as the year progresses.

However, even underlying performance (as measured by 11% growth in depletions, or sales to retailers) was impressive, thanks to continued strength in the Truly Hard Seltzer and Twisted Tea brands. We expect industrywide trends to benefit these offerings; management estimates that the hard seltzer category grew 200% (admittedly, off a small base, as it represents less than 1% of U.S. beer consumption) and the flavored malt beverage category (FMB) grew 13% in 2018. In contrast, growth in the craft beer market continues to decelerate, with the Brewers association estimating U.S. craft volumes grew just 4% in 2018, versus a five-year historical average around 12%.

We expect to lift our near-term sales outlook (our current estimate for full-year volume growth stands around 9%, versus management's updated outlook for 10% to 15%), which should raise our $216 fair value estimate by a mid-single-digit percentage. However, we expect industrywide deceleration in craft beer volumes will slow the pace of these top-line gains longer term and are reiterating our outlook for around 4% sales growth toward the end of our forecast period. Our outlook for profitability (low-teens average operating margin over the next five years) also remains intact. Even with this revision, we view shares as expensive, particularly given a high-single-digit uptick in after-hours trading.

We remain optimistic about Truly's near-term prospects thanks to expanding distribution and category attributes that align with consumers' bent toward lower-calorie, lower-sugar fare, and appreciate Boston Beer's strong positioning within the hard seltzer category (management estimates that the top two brands, Truly and White Claw, hold a combined market share around 80%). However, we aren't blind to that fact that the firm's flagship Samuel Adams brand continues to languish. As such, we appreciate management's efforts to bolster investments behind this brand (including redesigned packaging and a new formulation for Samuel Adams Summer Ale), which we think should support the brand equity and entrenched distributor relationships that underpin the firm's competitive edge.

From a profitability perspective, the increased usage of third-party breweries (continuing the trend seen over the last several quarters) coupled with higher temporary labor costs at company-owned breweries weighed on gross margin, which fell 100 basis points to 49.5%. However, we're holding the line on our full-year outlook for gross margin above 51% (which still falls within management's updated range of 50% to 52%, from 51% to 53% prior) as we think the firm's efforts to extract costs from its operations and strengthen its manufacturing capabilities (including an automated line for variety packs of hard seltzer) should help its keep its bottom line intact.
Underlying
Boston Beer Company Inc. Class A

Boston Beer Company is an alcoholic beverage company and a craft brewer. The company is engaged in the business of selling alcohol beverages throughout the United States and in selected international markets. The company's brands include Samuel Adams?, Twisted Tea?, Truly Hard Seltzer?, Wild Leaf? Hard Tea and Tura? Alcoholic Kombucha. The company produces alcohol beverages including malt beverages, hard cider and hard seltzer at the company-owned breweries and its cidery and under contract arrangements at other brewery locations. The company sells its products mainly in the United States, but also has markets in Canada, Europe, Israel, Australia, New Zealand, the Caribbean, the Pacific Rim, Mexico, and Central and South America.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Sonia Vora

Other Reports on these Companies
Other Reports from Morningstar

ResearchPool Subscriptions

Get the most out of your insights

Get in touch