Boston Beer (SAM) Follow-up

SAMUEL ADAMS CHOCOLATE BOX

We have written about Boston Beer (SAM) a few times over the past month explaining out bullish sentiment, and why we felt the stock would break over $160. Since our last article Boston Beer (SAM) reported it's earnings for the fourth quarter that met expectations, and issued an outlook that was inline as well. With the stock up 16% to start the year, and over 60% over the past 12 months, folks were expecting the stock to pull back on valuation concerns. Instead the stock has been very resilient, and sprung above the $160 mark, before finding resistance and falling back into the mid $150s.

Analysts continue to doubt Boston Beer (SAM), and have reiterated sell ratings or downgraded the stock. On February 21st, UBS maintained it's sell rating on Boston Beer (SAM) but raised it's price target $6 to $117. If you compare the UBS analyst comments from the initial downgrade in July 2012 to the reiteration on February 21st, you would think their reasoning for the rating was identical which was wrong  7 months ago, why would one expect it to be right now?

From July 2012:

UBS reports that 70 percent of Boston Beer’s recent growth has come from its Twisted Tea line and seasonal craft beer program. But UBS believes that slowing distribution gains for Twisted Tea and the lack of new seasonal offerings in the Samuel Adams portfolio will slow the current YTD trajectory.

From February 2013:

Angry Orchard ciders, launched last year, were a hit and that growth will be hard to match. For SAM to reach Street targets, UBS calls for more innovation and improvement from core Sam Adams portfolio

Today Williams Capital downgraded the stock from outperform to perform while raising the price target to $160. These analysts continue a trend on Boston Beer (SAM) since it's IPO where they issue a sell or neutral target on the stock, only to reissue the same rating months later while raising the target price. A trend that we think will continue as the stock climbs towards our short term target of $180.

Goldman Sachs has been the worst offender when it has come to predicting Boston Beer (SAM) 's future. Goldman has had Boston Beer (SAM) at a Neutral or Sell since it's IPO over $20. Anyone following their advice would have sold and shorted the stock at $40.  Based on the short interest, it looks like that's exactly what they have been doing or recommending their clients to do.

So how can all these analysts be wrong? The American beer market has struggled with negative growth since 2008, so that could be a factor in their analysis. Yet amongst all the negativity, craft beer has been a shining star, showing double digit growth for sometime now. And now, more then ever, it looks like Americans are back to drinking brew based on Inbevs last earnings report. Maybe Budweiser and Molson Coors are starting to fear the Craft Brews, which continue to show amazing resiliency and growth with Koch from Boston Beer (SAM), leading the charge as the 'Godfather' . It would probably be in the best interest of those companies to ensure the one true publicly traded American Craft Brewer is portraid to the public and investment community in a less then positive light? While at the same time, folks with bigger money then you and I, are trying to short the stock into the ground? But it looks like they underestimated the loyalty of Boston Beer (SAM)'s shareholders, the ones who were in on the IPO before the Goldman Sach's led offering.

With a P/E ratio in the low 30s, and the forward P/E dropping into the 27s, the bear case of the stock being over valued are unwarranted. With the potential catalyst for upside guidance from Sam in a can this summer, and the return of the American Beer drinker, we think the stock is poised to continue to break out in a major way. New short numbers are out on the stock and still show 24% , or 1.99 million of the shares are being held short. With the stock averaging less then 100k per day in trading volume, one would expect those betting the wrong side of the Boston Beer (SAM) story to start covering their underwater position, which should also help fuel the rally.

We currently hold March 165 calls, as well as April 170/180 calls.

 

 

Profile photo of jimmybobJimmyBob (Scott)has been trading equities for over 15 years, a majority of which were OTC micro-cap stocks. He started trading high risk stock options over the past 7 years, and has proven winning trades in excess of 15,000%.

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5 thoughts on “Boston Beer (SAM) Follow-up”

  1. Assuming a stock price of $155/share, and using the top end of management guidance for 2013 EPS, SAM’s forward P/E is north of 30x, mid-point of guidance gives a forward P/E of 32x ($155 / $4.90 = 31.6), and assuming a very generous growth rate of ~12%, PEG is still well north of 2. Why do you make the statement “forward P/E dropping into the 27s”, a forward P/E of 27x implies 2013 EPS of ~$5.75, where are you deriving 10%+ of upside to next year’s EPS in your projections?

    When you say “potential catalyst for upside guidance from Sam in a can this summer”, are you implying that by introducing their product in cans, they are going to attract new customers and not cannibalize bottle sales? I feel like those who buy canned beer are looking for a cheaper product and are not looking to spend $16 for a 12 pack

    After coming out with early guidance in December, SAM’s share price appreciated 40%+ to its peak at $162 before their 4Q earnings release, presumably driven by a short squeeze. After reporting in-line earnings and underwhelming guidance, do you really think those who are still short the stock will experience any catalyst over the next quarter to cause them to buy back their position? i.e. If they held through earnings, why are you expecting another short squeeze aside from the fact that you hold call options?

    1. I used $5.10 and stock price of 150 to derive PE so should have been under 30. Main thesis is that folks have had the Boston Beer story wrong, and will continue to have it wrong. If making money in the market was as easy as looking at fundamentals, we would all be rich. Well maybe not me, because i ignore the BS. The PE ratio has been high since the stock was under 90, and look where that overvalued thesis got you.

      As for the short squeeze, only 80k shares have been covered since the 40% run up since December, so again a ‘presumed’ short squeeze does not fully explain the rise in shares. Its a loyal base that is forward looking enough to see the value at the levels.

      best of luck to you!

      1. Pretty sure ~800k shares have been covered, which represents ~30% of the ~2.9mm shares outstanding sold short in early December

        Last time the PE ratio approached these levels, back in December 2010, the stock actually peaked at $100 before dropping 15% over the next few months and 30% over the next few quarters. That was also when SAM was trading at 2.5x revenue, not 3.3 like it is now. That was also when the company was expected to grow in the high teens, before the beer industry started to slow, and when they weren’t facing competition from the 1,000+ craft breweries that have launched since

  2. Will be over $200 tomorrow – I see your point with the numbers but just another case of looking outside the box and into the future like we have done with LNKD under $100, $SODA at $30, $NFLX at $58 and on and on…

    Best of luck to you!

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