Should Investors Raise a Glass to Boston Beer Company?

One of the strongest movers on a bullish day for the market is the Boston Beer Company (NYSE:SAM). The company, which is synonymous with its signature Sam Adams beers and Truly Hard Seltzers reported earnings per share (EPS) of $2.21 on revenue of $596.45 million. The top line number exceeded analysts’ estimates for $566.42 million. But the bottom line was lower than the $3.48 that was expected. 

Nevertheless, the EPS was a significant improvement from the prior year when earnings were negative. However, investors may be concerned that the earnings number Is not an improvement over 2019. The $2.21 EPS was 38% lower than 2019. This is even though revenue is up 57% over the same timeframe.  

Seltzer Sales Remain a Problem 

Part of the problem is that Boston Beer is trying to find the right product mix. The company overestimated demand for its Truly Hard Seltzer brand. Sales soared during the pandemic, but demand plummeted when consumers went back to bars and restaurants in 2021.  

This created a situation that is reminiscent of an actual Boston Tea Party. The company had to dispose of millions of cases of unsold inventory. That’s a key reason the company was unprofitable in 2021.  

The company is, however, seeing strength in its Twisted Tea and Hard Mountain Dew brands that are part of its “Beyond Beer” portfolio. And beer sales themselves remain strong. That was a dynamic that is playing out across the sector this quarter. And to get to the answer for that we can look at the continued strength in travel and entertainment.  

How Long are the Travel Coattails?  

When a stock makes such a large move after earnings, it suggests that the results caught people by surprise. But maybe investors shouldn’t have been so surprised. The beer and spirits industry is an adjacent industry to travel and entertainment experiences. The two go together in many cases like peanut butter and jelly.  

And if, as expected, more people travel for the holidays in 2022 than in either of the past two years, that would likely mean the possibility of another strong quarter for Boston Beer. The question for investors is just how long those coattails are. Because without them, persistent inflation would suggest that many consumers will look to trade down to less expensive brands or forego discretionary alcohol purchases altogether.  

The Company Lowered its Guidance Again 

It’s this dynamic that may be causing Boston Beer to once again lower its earnings guidance. The company is now saying full year adjusted earnings will be between $7 and $10. This is a cut on the high end from the range of $6 and $11 it forecast in April. And it’s a significant drop from the initial forecast for $11 and $16.  

SAM stock is now trading above 2019 levels. And the strong top line numbers may make it worthy of those numbers. I appreciate the company’s candor about supply chain and possible lowered demand. And while I believe that sales tell the ultimate tale, the stock looks more susceptible to heading lower than moving higher.  

Analysts tracked by MarketBeat give SAM stock a Hold rating with the potential downside risk of 10% for the stock. That may change as analysts weigh in after this earnings report. But there’s nothing that suggests to me that the rating will fundamentally change. This is a case where I like the product more than the stock.