On November 6, Boston Beer (NYSE: SAM)
closed at $1,062 a share. The company’s stock price had nearly tripled YTD, and was going sideways for a couple of weeks after a second consecutive post-earnings surge. But then, on November 9, the Pfizer (NYSE: PFE) vaccine news
hit the airwaves. Boston Beer shares plummeted more than 10% on the news. A late December rally quickly fizzled out just above $1,000 and now shares are trading even lower than they were on November 9.
So, why has Boston Beer fallen out of favor post-vaccine news?
Investors seem concerned that Boston Beer’s Truly hard seltzer – which has driven company-wide growth – will see its sales growth slow down in a post-COVID world.
The concern is understandable, but the sell-off has gone too far.
Hard Seltzer Sells Off-Premise More Than On-Premise… But Not by Much
Some drinks are more popular in restaurants, while others are more popular at home. Truly is in the latter category. On the Q1 earnings call, which took place in the early stages of the pandemic, CEO David Burwick said that the Truly brand’s growth has “accelerated and continues to grow beyond our expectations.”
On the Q3 call, Chairman C. James Koch said he believes “the seltzer category is underdeveloped on-premise.” It may just be a matter of time before that changes, however, as hard seltzer hasn’t been a popular drink for long. Koch raised an interesting point, saying that, “During these COVID times, the on-premise operators were not looking for new items.” Restaurant owners had have had their hands full over the last 10 months. Adding new drinks probably wasn’t high on many of their to-do lists.
Looking at 2019, we can see how on-premise stacks up against off-premise in normal times. The 2018 to 2019 growth in on-premise hard seltzer sales actually compared very favorably to off-premise sales growth. Off-premise sales tripled to $1.55 billion, but on-premise sales nearly 6x’ed to $1.18 billion.
According to Nielsen, hard seltzer off-premise sales increased 160% to $4.1 billion in the 52 weeks that ended December 26, 2020. To triple sales one year and then almost triple sales the next year is unbelievable. On-premise sales data isn’t available yet, but will likely grow at a slower rate due to COVID-related restrictions.
On-premise sales will rebound in 2021, with people going out more and restaurant owners open to changing their drink menus to accommodate new trends. On-premise sales will likely cannibalize off-premise sales, with people likely to drink less at home in 2021.
All of this to say: hard seltzer should see strong growth again in 2021. Just expect it to come from a different place.
According to IWSR, hard seltzer is still only 2.5% of the US market for alcohol – even after all of the hype and growth. IWSR is projecting that hard seltzer sales will triple by 2023. Hard seltzer still wouldn’t account for a large percentage of alcoholic beverage sales if that scenario comes to fruition, and could easily see strong growth deep into the 2020s.
Beer Sales May Not Fully Recover
On the Q3 call, Boston Beer noted that the Samuel Adams brand has been negatively impacted by COVID-19. Samuel Adams sales should rebound in 2021, but if past trends are any indication, they won’t return to pre-pandemic heights. According to Nielsen, sales of domestic beer dipped 4.6% between October 2018 and 2019.
It appears that some of the hard seltzer gains are coming at the expense of beer. That isn’t much of an issue for Boston Beer, however, as Truly and Twisted Tea have more than picked up the slack.
How Should You Play Boston Beer?
Boston Beer is scheduled to report its Q4 earnings on February 19. Shares went up 26% on Q2 earnings and 18% on Q3 earnings. Will the company beat expectations yet again? Possibly.
Shares have lagged the market over the last two months, which would indicate that expectations are lower than before. On the other hand, revenue is expected to grow by more than 50% in Q4, so even if the whisper numbers are the same as the published estimates, Boston Beer could have a tough time measuring up.
But the company’s 2021 guidance could come in above expectations. If it does, that would likely be enough to lift shares because SAM is only trading at 38.2x forward earnings – even though the company should see strong growth well into the 2020s.
Bottom line: there is more upside than downside with a Boston Beer investment.
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