Morningstar | We're Encouraged by Boston Beer's Top-Line Recovery, but Shares Remain Priced for Perfection
While shares of Boston Beer have surged since the beginning of the year, thanks to improving volume trends (with the first quarter of 2018 marking a return to depletion growth for the first time since the third quarter of 2015), we think the market has been overly optimistic about the company's top-line potential in a maturing craft beer market and are reiterating our $189 fair value estimate. We expect further premiumization trends will allow craft beer volumes to outpace the overall beer category (which we expect to remain roughly flat) longer term but see evidence to suggest that its momentum is slowing. According to the Brewers Association (an industry trade group), craft volume growth fell to a mid-single-digit clip in 2016 and 2017, well below the roughly 15% rate averaged over the prior five years, with craft now accounting for nearly 13% of domestic beer volume.Further, we expect competition within this maturing category to remain intense, as both the largest beer producers and newer entrants strive for volume gains in the higher end of the market. In tandem, we expect these factors will constrain Boston Beer's top-line growth to a mid-single-digit rate longer term. Still, our view of Boston Beer's entrenched relationships with distributors and retailers (which form the basis of its narrow moat) remains intact, and we contend the firm will be able to leverage these relationships to support a positive trajectory of growth, even amid further SKU rationalization in the beer aisle.
We also posit Boston Beer's ongoing efforts to extract costs from its operations will reinforce its bottom line and forecast average operating margin around 15% over the next five years, or 170 basis points above 2017. However, we surmise the firm will reinvest a portion of these savings to support its brands, which we find necessary to ensure its volume recovery is sustainable.
For additional detail on our outlook for the craft beer category and its impact on Boston Beer's valuation, please refer to our report, "Boston Beer's Improving Prospects Don't Justify Frothy Valuation."
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.
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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.
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