Boston Beer (NYSE: SAM)
reported its Q3 2020 earnings on Thursday after the bell, and investors cheered the results, sending shares up more than 18% in Friday’s session. This marks the second consecutive post-earnings surge for Boston Beer, which saw its shares pop more than 26% after the Q2 report
I’ve been recommending Boston Beer since June, with the strong up-trend making shares an attractive proposition back then. But the past two quarters have shown that the fundamentals – which were mixed back in June – have caught up.
But is SAM still a buy after doubling over the past four months?
Let’s start by looking at Q3, before considering how it fits in the broader context.
Q3 Mostly Beat Expectations
We’ll start with the only piece of (slightly) bad news: Boston Beer missed on revenue in Q3. It was up 30% yoy to $492.8 million, but that fell short of consensus estimates for $519.5 million.
Earnings were a different story, however, with the $6.51 a share blowing away the estimates of $4.63.
But if I had to pinpoint what made shares pop almost 20%, I’d say it was the guidance. Boston Beer now expects depletions to be up 37-42% for full-year 2020, much higher than previous forecasts of a 27-35% increase. And the company expects its momentum to carry into 2021; depletions are expected to grow 35-45% in 2021 – that is well above the previous estimates of a roughly 30% increase.
How Much More Will Truly Grow?
The hard seltzer market has been red hot over the past year, and at just 2.5% of the total US market for alcohol, it’s not expected to slow down anytime soon.
The question with SAM’s Truly Hard Seltzer isn’t if it will continue to grow – it will – but just how much it will continue to grow.
On the Q3 earnings call, Boston Beer reiterated that, “Truly is the only national hard seltzer, not introduced earlier this year, to grow its share during 2020.” This is great to hear, as the competition has gone from high to very high. SAM does expect category growth to slow next year, from “probably 180-200%” in 2020 to “maybe 80-100%” in 2021.
I’m not sure if Truly’s market share will grow again next year, but I could see it maintaining its market share. That would likely equate to 80-100% growth. Not bad.
Contributors From Every Direction Next Year
Truly Hard Seltzer has been responsible for a good percentage of Boston Beer’s growth in 2020, masking weakness in some of its other brands – particularly Samuel Adams and Angry Orchard.
But that should change next year. On the Q3 call, CEO David Burwick said, “I think the difference next year to me is I feel like we're going to be growing across the entire portfolio. And we'll continue some very significant growth in hard seltzer, but we're going to have contributors coming from every direction next year.”
Spending to Fuel Growth
Another thing I was happy to hear on the earnings call is Boston Beer’s commitment to spend in order to fuel growth. CFO Frank Smalla said, “We're targeting the long-term growth of our brands and invest what is needed.”
He had more to say on the subject, but the bottom line is that Boston Beer sees a lot of growth opportunities, and is willing to sacrifice short-term earnings for long-term market share. This is often the best way to go for fast-growing companies – Amazon (NASDAQ: AMZN) is perhaps the most prominent example.
Of course, once the growth opportunities are exhausted, Boston Beer can focus on maximizing earnings. Smalla acknowledged that, saying “we will go optimize later on.”
So… Is Boston Beer Still a Buy?
Yes. Even at its current valuation of more than 70x forward earnings.
Truly is my biggest reason for optimism. It isn’t going to double every year for the next five years, but again, hard seltzer is still only 2.5%of the total US market for alcohol. It’s hard to project hard seltzer growth over the next five years – and even harder to specifically project Truly over that timeframe – but the numbers could be truly (pun intended) massive for Boston Beer by then.
Add in the rest of Boston Beer’s portfolio, and its demonstrated operational chops, and this company’s growth story could extend longer than many investors anticipate.
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