Boston Beer Continues To Underperform: Time To Dump It?

A successful portfolio manager is well aware of the fact that dropping underperforming stocks at the right time is as important as picking the lucrative stocks. Indicators of a stock failing to perform include a fall in its share price and a continued downtrend in estimates.

One such stock that has recently been in the doldrums is Boston Beer Co. Inc. (NYSE:SAM) as its stock price has fallen 13.4% year to date. The performance compares unfavorably to the 4.1% decline in the Zacks categorized beverage-alcoholic market.

Further, estimates for this Zacks Rank #5 (Strong Sell) stock have witnessed a downtrend. In the past 30 days, the Zacks Consensus Estimate of $1.26 and $6.34 for fourth-quarter 2016 and full-year 2016 fell 4 cents and 3 cents, respectively.

What’s Wrong?

The primary reason behind the decline in the company’s stock price is the troubles plaguing its Samuel Adams brand, which has been up against severe competition in the craft beer market and a weakness in the cider class. Moreover, Boston Beer remains susceptible to weak depletion trends, which along with other factors, hurt its results in the previous quarter.

Boston Beer reported a dismal third-quarter 2016 as both the top and the bottom line lagged estimates and fell year over year. While bottom-line results were affected by lower revenues and soft gross margin, the top line was impacted by lower shipments, a fall in depletions and decline in revenue per barrel due to product mix. Depletions were hurt by new beer launches amid sluggish growth in the craft brewing industry. Depletions volume came in below expectations due to persistent declines in the Samuel Adams, Angry Orchard, Coney Island and Traveler brands, partly mitigated by growth at the Twisted Tea and Truly Spiked & Sparkling brands. Additionally, cider categories continued to disappoint.

Further, the company has been witnessing contraction in the gross margin for three straight quarters now. In the third quarter, the company’s gross margin contracted 90 basis points to 52.7%, attributable to an adverse product mix and fixed-cost absorption, partially offset by improved prices and cost-saving initiatives at the breweries. The soft margin, combined with the bleak outlook, poses threats to the company’s future performance.

Based on the year-to-date trends and expectations for rest of the year, the company lowered its earnings and depletions outlook for 2016. Earnings per share guidance was cut as well as narrowed to $6.30–$6.70, compared with $6.40–$7.00 guided earlier. It expects depletions and shipments changes of -6% to -2%, compared with the previous guidance of between -4% and zero.

Additionally, Boston Beer remains vulnerable to the potential implementation of an excise tax on spirits and intense competition from well-established players in the industry.

However, we remain encouraged by the company’s efforts to revive its Samuel Adams and Angry Orchard brands, alongside accelerated focus on cost savings and efficiency projects. We believe Boston Beer’s practice of acquiring assets to expand geographically will aid it to gain significant market share.

Key Picks in the Sector

Some better-ranked stocks in the beverage industry include Embotelladora Andina S.A. AKO.B, Tsingtao Brewery Company Limited (OTC:TSGTY) and Coca-Cola Amatil Limited (OTC:CCLAY) .

Embotelladora Andina has witnessed an uptrend in estimates in the past 60 days and has a positive surprise history in the trailing four quarters. Moreover, the stock has surged nearly 29.3% in the past one year. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Tsingtao Brewery, a Zacks Rank #2 (Buy) stock, has jumped 3.5% in the last three months. The stock has a long-term earnings growth rate of 7.3%.

Coca-Cola Amatil, also carrying a Zacks Rank #2, has gained nearly 5.3% year to date. Moreover, it has a long-term earnings growth rate of 10%.

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