Tuesday, January 5, 2016

A Craft Buy

I decided to purchase shares of Boston Beer Company better known for its Samuel Adams brand. The company also sells Angry Orchard Cider and Twisted Tea. When the company was founded in the 80's craft beer was an under served market. The company continues to innovate in craft beers with its Alchemy and Science Subsidiary which creates different craft beer & ciders, and operates small craft breweries located throughout the USA.

The challenges are not small for the company. It faces substantial competition from the big brewers as they expand offerings and acquire other small craft brewers. The company even noted in its 2014 annual report that the number of craft brewers has expanded from 420 in 2006 to an estimated 4,500 in 2013.  I think the company fully recognized this trend and that is why its Alchemy and Science subsidiary will prove to be a valuable asset in the coming years. I personally visit the occasional craft brewery and I am usually pleased with the results. However Sam Adams products have always been one of my favorites, and it's Angry Orchard brand I think has plenty of potential.

Here is why. As a naturally gluten free product cider appeals to consumers trying to avoid gluten in their diet, and as the new social drink of choice for those actually intolerant(although its estimated to be way less than 1% of the total population). Yet an overlooked aspect is that plenty of women have been moving to cider from beer. I see it in my social circles as women cite their lack of taste for beer, and it appears more socially acceptable for a women to be out with a bottle of cider than a beer in hand.  I remember going to an inaugural cider tasting event in 2013. There were about 40 vendors present. In 2014 there were almost 60. For 2015 there were almost 90 and the location had to be moved to accommodate the huge influx of vendors and attendees. I'll be excited to see what this year brings. Now these are just my personal experiences, but the trend is up for sure. There is a lot of potential in the cider category still untapped in the USA and the Angry Orchard brand is a market leader.

Boston Beer has seen some really great revenue growth the last few years too. It has experienced 5 year revenue growth of 16% that includes a 55% jump from 2012-2014. The company has an operating margin that has stayed stable around 16% the past 3 years and a net income percentage above 10% which I also love. Additionally the company has only 4% of sales overseas as reported in its 2014 annual report. My guess is the number is a bit higher for 2015, but this is actually a plus as the company does not lose from currency translations.  Additionally the company benefits from buying many of its raw materials from Europe with contracts negotiated in Euros or Sterling. I expect the dollar to stay stronger allowing the company to buy raw materials at a cheaper price over time as contracts get renegotiated. That's a hidden plus from the way the company operates and I do not think it is being reflected in the price.

The balance sheet is great with very little debt. The current ratio stands at 2.05, and when I subtract goodwill from assets I get an Assets/Liability ratio of 3.50 which is solid. Shows me that company is conservatively run, and instead of financing expansions with debt the company is choosing to use its cash as it sees a high rate of return on investments.

That is evident by an ROI of 20%, ROE of 22%, and ROA of 16%. All very respective numbers.  On top of this the company has been buying back shares the last couple years. While I'm not glad to see the cash used to buy shares at a price way higher than it is now I know my future share of earnings will be more substantial.

The stock is a bit pricey with a P/E of around 26 and yield of total stock yield of 3.64% at today's prices. Yet the stock has fallen all the way from $320 to around $200 for a 37.5% correction. This might not necessarily be the low for the stock, but I think it represents enough of a fall for me to add. If the stock falls a bit further to maybe 185-190 I'll make one more add. Cheers.

The stock was added on 12/29/15 at the closing price of 204.25

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