Money Management

Boston Beer (SAM) up 34% since last earnings report: can it continue?

A month has passed since the last Boston Beer (SAM) earnings report. Stocks rose about 34% during that time, outperforming the S&P 500.

Will the recent positive trend continue until its next earnings release, or is Boston Beer likely to experience a pullback? Before we dive into how investors and analysts have reacted in recent times, let’s take a look at the latest earnings report to better understand the important catalysts.

Boston Beer second quarter profits beat, sales up Y / Y

Boston Beer Company has released optimistic results for the second quarter of 2020, in which both upper and lower results exceed estimates and increase year over year. Despite the impacts of the coronavirus epidemic in early March, its activity experienced significant growth in the second quarter. Boston Beer adjusted second-quarter earnings of $ 4.69 per share topped Zacks’ consensus estimate of $ 2.20. In addition, net income nearly doubled from the $ 2.34 earned a year ago, primarily due to increased revenue from shipping growth of 39.8%. This was partly offset by dismal gross margins and increased operating expenses.

The company has witnessed a significant reduction in demand for kegs from the on-site canal and an increase in labor and security costs at its breweries, due to the ongoing pandemic. In the second quarter of 2020, it recorded nearly $ 4.1 million in pre-tax coronavirus-related reductions in its net income and increases in other costs. This included $ 5.8 million related to the drop in revenue due to drum returns from distributors and retailers and $ 8.3 million other costs related to COVID-19, of which $ 5.6 million was recorded in cost of goods sold and $ 2.7 million in operating expenses. Additionally, security measures related to COVID-19 have resulted in a reduction in internal capacity, moving more volumes to third-party breweries. This resulted in higher production costs and had a negative impact on the gross margin.

Net income rose 42% year-on-year to $ 481.1 million and topped Zacks’ consensus estimate of $ 419 million. Excluding excise taxes, sales increased 42% year over year to $ 452.1 million. The increase in sales can be mainly attributed to a 39.8% improvement in shipments to 1.9 million barrels. Excluding the addition of the Dogfish Head brand, as of July 3, 2019, shipments have increased by 35.3%. Runouts increased 46%, including a 42% increase in traditional Boston Beer brands and a 4% increase in the addition of the Dogfish Head brand. This marked the ninth consecutive quarter of double-digit growth in depletion, supported by the strength of the Truly Hard Seltzer and Twisted Tea brands as well as the Dogfish Head brand. This was somewhat offset by the sluggishness of the Samuel Adams and Angry Orchard brands.

Exhaustions for the cumulative period of the year up to the 28 weeks ended July 11, 2020, have increased by nearly 42% compared to that observed during the period of the previous year. Excluding the Dogfish Head Brewery, runouts increased 37%.

Costs and margins

Gross margin improved 31.8% year over year to $ 209.6 million. However, the gross margin contracted 350 basis points to 46.4% due to high processing costs resulting from higher production at third-party breweries. Additionally, higher prices and cost savings at company-owned breweries hurt gross margin.

Advertising, promotion and sales expenses increased 6.7% in the quarter to $ 100.3 million. The increase is due to increased investment in media and production; expenses related to the inclusion of the Dogfish Head brand as of July 3; higher salary and benefit costs; and increased freight to distributors due to higher volumes. On the other hand, reduced investment in local marketing and national promotions has had a chilling effect. General and administrative expenses totaled $ 29.7 million, up 11% from the prior year quarter. The increase is mainly due to higher salaries and benefits as well as the addition of general and administrative expenses for Dogfish Head effective July 3, 2019. This was somewhat offset by a one-time cost of 1 , $ 5 million related to the Dogfish Head transaction, which was initiated in the second quarter of 2019.

Finance

As of June 27, 2020, Boston Beer had cash and cash equivalents of $ 86.7 million and total equity of $ 827.5 million. The company currently has $ 150 million on its line of credit to use to improve cash flow and liquidity amid the coronavirus pandemic. During the second quarter and the period between June 28 and July 18, Boston Beer did not repurchase any shares. As a result, the company has $ 90.3 million remaining under the $ 931 million share repurchase authorization.

Outlook

Management anticipates increased investments in the second half of 2020 compared to the first half, as well as accelerated growth of the Truly, Twisted Tea and Dogfish Head brands. In particular, the Truly Hard Lemonade is experiencing solid growth and should continue this momentum. In the second quarter, Samuel Adams Boston Lager and Angry Orchard Crisp Apple saw double-digit growth in off-premise channels. However, overall volumes for Samuel Adams and Angry Orchard have remained lackluster due to impacts from COVID-19 and are expected to decline for the remainder of the year, given store closings. That said, it is on track to reopen its stores with a greater focus on outside service and take out.

In addition, the company is working to resume its supply chain activities, which will remain under pressure in the second half of the year. Apart from that, the increased use of third-party breweries to meet growing consumer demand is likely to result in additional costs, which could weigh on margins in 2020. Going forward, Boston Beer has released a forecast. for 2020 due to runouts and growth in shipments. as well as strong performances in the Truly and Twisted Tea brands.

For 2020, management expects net income to be between $ 11.70 and $ 12.70 per share. In addition, runouts and shipments are expected to increase by 27% and 35%, respectively, and the addition of the Dogfish Head brand is expected to contribute 1-2%. In addition, the gross margin is expected to be 46-48%. Advertising, promotion and sales spending is expected to be in the range of $ 70 million to $ 80 million, and capital spending is expected to be in the range of $ 180 million to $ 200 million.

How have the estimates evolved since?

Over the past month, investors have witnessed an upward trend in the new estimates. The consensus estimate has changed to -13.84% due to these changes.

VGM scores

Currently, Boston Beer has an excellent growth score of A, although it lags a lot on the Momentum score front with a D. Tracing a somewhat similar path, the stock received an F rating on the side of value, placing it in the fifth quintile for this investment strategy.

Overall, the stock has an overall VGM score of D. If you’re not strategy-focused, this score is the one you should be interested in.

Outlook

Estimates have trended higher for the stock, and the magnitude of these revisions indicates a downward shift. It’s no surprise that Boston Beer has a Zacks Rank # 1 (strong buy). We expect an above-average return on the security over the next few months.

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