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Boston Beer Co Inc (SAM): Should You Buy?

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When I enter any large liquor store looking for a nice sixer to bring to a party, I take entirely too long to choose unless I close my eyes and go for it. There are just too many choices! Reality says that only the strong brands will survive, but some of the once “no-names” on the shelf are much more than that today, such as Boston Beer Co Inc (NYSE:SAM). The newest owner of a 1% market share was hammered last week because of a weak earnings report. Analysts have a powerful say, but this brewer has what it takes to get past this hangover.

Home turf

As Anheuser-Busch InBev NV (ADR) (NYSE:BUD) continues to focus on global expansion, micro breweries aren’t looking overseas just yet. The goal of taking down the juggernaut with a $154 billion market cap just isn’t realistic, but taking a chunk of the market is obviously feasible.

Craft brews now account for 7% of the US beer market, climbing steadily from the 3% control 10 years ago. Kim Jordan, CEO of Colorado-based New Belgium Brewing, says that the largest problem is “it is expensive to invest in all that capacity.” Absolutely true, but as The Motley Fool readers know, investment success doesn’t happen overnight.

Boston Beer Co Inc (NYSE:SAM) went public in 1995 after 11 years of slow-but-steady success. Other than being the largest craft-beer company and the only one on the market at the time, the stock didn’t enter many Wall Street discussions. That changed during the 2008 financial crisis, when the stock’s climb to a triple-figure share price truly began.

For simple argument’s sake, one can say it took 20 years for Boston Beer Co Inc (NYSE:SAM) to become relevant in the market, but those who were patient with their beer now own a very premium stock, trading at 34 times earnings.

Boston Beer Co Inc (NYSE:SAM)Whether simply for press appeasement or a factual rebuttal, Boston Beer Co Inc (NYSE:SAM) responded to the sour earnings pointing to advertising and marketing as a culprit for missing analysts’ EPS expectations by more than 10%. However, revenue rose 20%, meaning that cash was flowing in but being allocated for promotional use and toward other departments.

Although the company has soared to attain a $1.9 billion market cap and can withstand a downturn with a valuation up over 36% TTM, investing in brand promotion still proves difficult in the shadow of Anheuser-Busch and other giants. The key is to attack local markets and build loyalty, not go after economies of scale that cannot be matched.

Quality over quantity

Craft brews are most often marketed as containing quality ingredients, innovative recipes, and as having received personal care by brew-masters. Keeping my personal opinion on beer quality aside, Anheuser-Busch has come under fire recently about the consistent quality of its products. Reports of watered-down beer began to emerge in February, featuring lawsuits in many states applying to a variety of the company’s products.

Although no monetary consequences have resulted, the negative press was quickly ousted with advertising similar to that of Jim Koch’s (Boston Beer Co Inc (NYSE:SAM) founder) pitches of quality, consistent brewing in television advertisements. Companies of the size and scale of Anheuser-Busch can afford to make mistakes, but micro breweries need to take the time to build consumer loyalty and invest the time required for success.

Instead of sitting behind the scenes for a decade, the trend may shift toward joining forces and accelerate the “investment in that capacity” of advertising and marketing.

Take Craft Brew Alliance Inc (NASDAQ:BREW), a company that combined Oregon-based Widmer Brothers Brewing and Seattle-born Redhook Brewery to form a publicly-traded company. Neither operation had the opportunity to hit Wall Street individually, but together the companies have built brands that have brought the stock out of the ashes, rewarding buyers with a steady climb since its IPO.

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