The Boston Beer Company, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

The Boston Beer Company is a leading craft brewer, known for its Samuel Adams brand, and also produces a diverse range of other alcoholic beverages.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

The Boston Beer Company (ticker: SAM) operates primarily within the alcoholic beverage industry, focusing on brewing and selling a variety of beers, hard ciders, and other malt beverages. Here is a breakdown of their business:

  • Brand Portfolio: SAM’s brand portfolio includes Samuel Adams, Truly Hard Seltzer, Twisted Tea, and Angry Orchard Hard Cider, among others. The portfolio is diversified across various product types in the beverage space and the company has shown an interest in expansion beyond its traditional business model.
  • Revenue Distribution: The company generates revenue through sales to distributors, who then sell the products to retailers. They also have a direct to customer sales model in some cases, which allows them to interact with consumers more effectively. The revenue is mainly within United States.
  • Competitive Landscape: The alcoholic beverage industry is intensely competitive, featuring large established brewers, craft breweries, and new entrants, all vying for market share. The industry has witnessed increased consolidation, and more companies are focusing on new products such as hard seltzers, and flavored alcoholic beverages.
    • Key competitors include Anheuser-Busch InBev (AB InBev), Molson Coors, Constellation Brands, and a host of smaller craft brewers.
  • What Makes the Company Different?:
    • While SAM is not the biggest player in the alcoholic beverage industry, they have established themselves among the leading craft brewers.
    • Their brand recognition of Samuel Adams is strong and they have expanded beyond the original brand into new categories like Hard Seltzer and hard iced teas.
    • They try to position themselves as a beverage innovator, especially in the non-beer alcoholic beverage market.
    • Also, the company has built a strong distribution network and long lasting relationships with distributors.
  • Recent Trends: The industry has experienced a decline in beer sales while the seltzer and RTD (ready-to-drink) categories are growing faster than the beer industry. The industry is facing a shift in consumers’ preferences and buying habits. A lot of companies, SAM included, have focused in product innovation to capture new sources of revenue.
  • Financial Performance:
    • Revenues are highly volatile, due to changing consumer preferences and competitive dynamics.
    • High production and distribution costs create a challenge for the company, and the margins are not always reliable.

Financials Deep Dive

Here’s an in-depth analysis of The Boston Beer Company’s financials:

Revenue and Profitability

  • Revenues: SAM has seen volatile revenue patterns, with some quarterly figures showing growth while others saw revenue decline. Their most recent quarterly results show decreased revenues, both yearly and quarterly.
  • Gross Margins: SAM has a history of generating great gross margins that are consistently at 50% or slightly higher. However, their gross margins have suffered due to the higher inflation and increased supply chain costs.
  • Operating margins: Operating margins are volatile and depend on how effectively they are able to manage their costs. In the last quarterly results, operating margins have fallen to a meager 3%.
  • Earnings: The earnings of the company are volatile and are highly dependent on how well the company can manage revenue growth and expenses at the same time. In the last quarterly results, the net income took a huge dip and was barely positive.
  • Latest Update: It is important to note the recent results, as seen in Exhibit 34 (Quarterly Report Ended September 30, 2023) showed that while revenue rose in 2023 vs 2022, the total revenue for the first nine months of 2023 was down 6% and the company swung to a massive loss. Also, gross margins saw a decline of more than 3% to 44.3%. This shows the company is facing severe difficulties in balancing revenue growth and profitability.

Balance Sheet

  • Cash and Investments: SAM has historically maintained a solid level of cash and short-term investments and other liquid assets on its balance sheet. This provides financial flexibility for investment and debt repayment.
  • Debt Levels: The company’s debt levels are low compared to its overall financial health. They are a very conservative company and rarely rely on long term debt. Their balance sheet is pretty liquid and has little debt making it safe.
  • Latest Update: Their most recent financials still show the company to be in a good health, with more cash and liquid assets than debt. Their cash and cash equivalents sit at 329 millions and debt stands at 45.5 millions.
  • Working Capital: The company does have working capital, but the inventory seems to be high and could be problematic if they fail to sell off the inventory as fast as they are creating it.
  • Overall: The balance sheet is pretty healthy. They have enough liquid assets to cover debts.

Key Considerations from Earnings Calls & Reports

  • Volume Decline: The recent earnings calls and reports from 2022 and 2023 have discussed the decline in volumes. The core beer brands have continued to struggle, and that is hurting overall revenue. The Truly hard seltzer has seen massive sales decreases, and the management hopes to reverse this trend with new products.
  • Pricing: The company is focused on implementing price increases across its products, but management is expecting that consumer behavior may be impacted by higher costs.
  • Cost Management: Management has discussed focusing on improving efficiency to cut costs. However, they are not expecting any material changes in the short term. The biggest problem are input costs, which have been heavily affected by high inflation. They also expect shipping and logistics cost to remain elevated for some time to come.
  • Innovation: Management continues to stress their focus on innovation and their pipeline of new products. This is crucial for the company because their legacy beer brands are suffering and they must innovate to compete with new entrants.
  • Hard Seltzer: The market for hard seltzers has become increasingly competitive and many brands are failing to get any meaningful traction. Truly, which was one of the first entrants in the hard seltzer category, has seen sales numbers drastically decrease. Management has indicated that they are working on new product lines for this category, and is betting on new flavors to revitalize the brand.
  • Acquisitions: They are actively seeking out potential acquisition targets, but have emphasized that any acquisitions must be a strategic fit and must increase the intrinsic value of the company. This means that they are not looking for acquisitions just for top line growth.
  • Guidance: The company continues to be reticent on giving full-year guidance, which indicates a lack of confidence and a tough year ahead. However, they believe their long term plans remain intact.

Moat Assessment: 2/5

SAM has a limited moat based on a few factors:

  • Brand Recognition: They have a well established brand, SAM Adams, that holds a niche market in craft beer enthusiasts. However, this moat is not very strong as consumers can easily switch to competing brands. Also, their other brands like Truly and Twisted Tea do not have such a strong moat as the product category is highly competitive.
  • Distribution Network: Their relationship with a strong distributor network, which they created over a long time, does provide them some advantage over new companies, since setting up such a network is very costly. However, other big companies have similar distribution networks which negates this advantage.
  • Innovation and Products: The company is focused on innovating and bringing new products to the market. For example, Truly hard seltzer came as a breath of fresh air for the alcoholic beverage market, and it was a very profitable venture. However, the highly competitive industry creates problems for them as other competitors have similar products in the market. So, they must constantly be innovating to have any competitive advantage.

Risks to the Moat

  • Intense Competition: The alcoholic beverage industry is highly competitive. Many large and small companies are fighting for the same market share. This makes it difficult for SAM to consistently increase revenues and profits.
  • Changing Consumer Preferences: The changes in consumer’s preferences can quickly make any brand and product irrelevant. They must constantly innovate to keep up with the trends and satisfy consumers. They have seen it first hand, with their Truly brand.
  • Volatility in Prices: Rising prices in commodities, logistics and labor have hurt the company’s margins. If they can’t pass these costs on to the consumer, then their profitability will suffer.
  • Economic Slowdown: The company’s products are not a necessity item, so a slowdown in the economy can hurt revenues. Consumers are more likely to cut on discretionary spending and that may harm SAM’s revenues.
  • Cannibalism: As the company continues to grow into new product categories and bring new drinks into the market, they might start cannibalizing their own sales with similar products, impacting overall value of the company.

Business Resilience

  • Diversified Portfolio: SAM’s brand portfolio is quite diverse and they are not overly reliant on any single brand. They are actively pushing new products and brands to cater to the growing demand in the flavored alcoholic beverages and ready-to-drink cocktails market.
  • Management Focus: Management seems to be focused on right things like cost management and innovation. If they implement their plans successfully then they can navigate the tough competitive situation.
  • Financial Stability: With a solid balance sheet, the company is capable of weathering a temporary financial downturn. They have a long history of dealing with tough markets and they can use their expertise to weather this one as well.
  • Continuous Innovation: Their ability to innovate and enter new categories gives them a good chance at creating a strong market position. This has led to the success of their products like Truly and Twisted Tea in the past.

Understandability Rating: 2/5

The Boston Beer Company’s business, while operating in an understandable sector (alcoholic beverages), is fairly complex due to these factors:

  • Diversified Product Portfolio: The company has various brands and products in its portfolio, which creates complexity in the analysis.
  • Intense Competition: The beverage market is very competitive and that makes understanding the factors affecting the company difficult.
  • Distribution Complexity: Understanding the distribution network of the company and its intricacies are hard for a non-industry expert.
  • Innovation Heavy: The company is constantly trying to push new products into the market to try to capture new trends, which makes the business more difficult to understand from a top-down approach.

Balance Sheet Health: 4/5

The Boston Beer Company has a relatively strong balance sheet, earning a health rating of 4/5:

  • Strong Liquidity: They have enough liquid assets and cash to more than meet their current liabilities. This ensures that the company can meet short term and unexpected financial obligations.
  • Low Debt: The company’s debt is quite low, which gives them a lot of financial flexibility and means they have little risk of bankruptcy due to their debt.
  • Profitable: While profits are currently down, they have a history of consistently generating high profits. With effective management of expenses, they are more than capable of turning a profit.

In summary, while the company is facing tough times in the alcoholic beverage industry, it is still fundamentally sound and is capable of navigating the challenges, and returning to consistent profitability.