Craft brewing’s most prominent emissary made a surprising move on the stock market today, and it had nothing to do with the history-making beer news that unfolded this week. Boston Beer Co. stock, recently considered somewhat of a loser in trading circles, jumped to close up more than 15%, leading financial reporters to place it on their “biggest gainer” lists at midday.
The action – which comes after yesterday’s Q2 earnings call -- not only indicates that despite observer pessimism, the maker of Sam Adams Boston Lager can still fight competitively in today’s nearly saturated craft brewing marketplace but also shows that on the stock exchange, bad news sometimes metastasizes into good news.
Basically, the numbers are bad for Boston Beer. Before this quarter, the company endured three disappointing quarters in a row, and as compared with the second quarter of last year, shipment volume is down 4% and depletions are down 5%. None of the other economic markers look too good, either. But here’s the rub: Q2 revenue of $244.8 million (-8.9% Y/Y) beat expectations by $5.93 million and earnings per share ($2.06) beat by $0.12, and that was enough to impress investors.
“The expectations got way too negative,” says Michael Ranalli, a former bond trader who analyzes the markets for SeekingAlpha.com under the penname “Courage and Conviction.” Ranalli owns SAM stock in his retirement account.
“People were saying, ‘The brand is dead,’ and all this other nonsense. What the brewery basically proved is they can still make money,” he says.
As he has in past calls, founder and chairman Jim Koch (who, it should be noted, became the craft industry’s first billionaire in 2013) blamed his company’s troubling sales on lowered demand for his core product, Boston Lager; Traveler shandy; and his Angry Orchard line of ciders. The release of the Truly Spiked & Sparkling brand and a nitro line, as well as growth to Twisted Tea and the newly acquired Coney Island Brewing have been helping sales, but not enough.
“Our Samuel Adams brand lost share of craft due to the increased competition and continued growth of drinker interest in trying new styles,” he said. “While the launches of our new beers, including the Samuel Adams Nitro project and Samuel Adams Rebel Grapefruit IPA, have been successful and well received, they have not offset declines in Samuel Adams Boston Lager and our Samuel Adams seasonal beers.”
As an innovator and early superstar of the craft industry, Koch brewed the beer that turned many drinkers onto the concept of independent brewing for the first time. But as the Harvard MBA’s company grew to claim the title of second-largest American-owned brewery (after Yuengling) at the same time that more than 4,000 competitors entered the scene, his own sales suffered. As he suggested, craft drinkers are notoriously fickle, often choosing what’s new or limited over the tried-and-true.
Many supporters lament that Koch, despite his best efforts to remain inventive, suffers from the success of the industry he helped pioneer.
“Boston Beer is facing some real troubles,” writes “The Value Investor” on Seeking Alpha. “Increased competition has weighed heavily on the results of Boston Beer, which is really facing an operational crisis. While the company is still the market leader in a lucrative and very interesting market segment, market share losses are quite aggressive. This has caused quite some anxiety among investors as the management seems slow to act in a fast-moving market.”
The accusation of being slow to act is only true some of the time. When Boston Beer rolled out its Angry Orchard brand nationwide in 2012, it single-handedly brought craft cider to the mainstream. With 58% market share, it overwhelms the alcoholic cider category. But no one should have expected it to continue to match cider’s 71% year-over-year growth in 2014, especially given that the category’s U.S. sales growth dropped to just 10.8% last year, as reported by The Cider Journal.
“There are a lot of fixed costs (in brewing), so if volumes come in lighter you can’t turn on a dime,” says Ranalli.
To make up for their declines, corporate executives pledged during the Q1 call in April to spend the next nine to 18 months reducing operating costs by $50 million. Yesterday, they announced that so far they’ve managed to reduce advertising, sales and promotions expenses by 11%. They also reported that overall depletion rates have improved over the past three weeks.
The brightening picture will make Boston Beer more attractive to investors, yes, but also to potential buyers. Speculators believe macrobreweries should want to take over craft brewing’s biggest prize (also the second-largest American-owned brewery), and they point to its lack of debt and stock buybacks as indications of health. Though Koch owns the controlling interest in his company with 100% of its Class B stock, Ranalli points out that Mondolez’ recent bid for Hershey, a similarly structured corporation, indicates that not all companies are afraid to take over smaller competitors they can’t necessarily control.
Today’s closing stock price at $190.16 remains far from its 52-week high of $260.51 but it certainly has rebounded from its low of $145.33. We’ll see if Boston Beer executives and investors are raising or throwing their mugs in anger in three months, after the company reports its Q3 earnings.
