Archive for the ‘SAM’ category

Boston Beer (SAM) – Facing Annihilation?

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“Let’s take the criticism, that the scale brewers have been slow to innovate and to bring exciting, fresh and new brews. That’s probably correct. The reality, though, is we’ve recognized that and we’re moving very quickly.”

– Alan Clark, CEO of SABMiller, the world’s second largest brewer (source)

When I think about the competitive forces moving against SAM, I can’t help but consider the parallels to the samurai just before the Battle of Shiroyama (here).

Far outnumbered in size and might, SAM’s business today appears just as vulnerable as Saigō’s head in 1877.

I’ve spent many hours racking my brain and the only conclusion I can come to is this one: this will not end well for SAM shareholders.

But like all humans, I am fallible. So I am writing to seek out different opinions on SAM. Please tell me where I’m wrong (previous notes here).

Boston Beer Company (SAM) – The Pain Is Just Beginning

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I’ve written SAM up 3 times:

My negative bias has centered around three key points:

  1. SAM is facing an all-out assault on its business – from niche local breweries to large international brewers – and consumers are getting saturated with choices. It’s this shift – from wide-open greenfield to fiercely competitive brownfield – that will cause investors to re-price this company.
  2. This competition will drive up costs and compress margins.
  3. SAM’s stock is incredibly overpriced relative to the fundamental headwinds it’s facing.

Today the market is finally waking up to the issues I’ve been highlighting for 3 months. Just take a look at what the company said on yesterday’s conference call:

[…] increased investments in advertising, promotional, and selling expenses.

During our first quarter 2014, gross margin decreased to 49%, compared to 50% in the first quarter of 2013. The margin decrease was a result of product mix effects, increases in brewery processing costs and increases in consumer, program, and incentive costs, which were only partially offset by price increases.

[…] you’re seeing a little bit of cannibalization in the portfolio.

[…] there is a lot of uncertainty as we look at what’s going on in the category, we’ve got two or three major players pushing brands into the cider category or reinvesting behind existing brands.

I think that we’re seeing continued increases in the shelf space devoted to craft beer. But we may be getting to the point where those increases are going to slow just because there is only a limited amount of space that can be taken out of the mass domestic beers before they start running into out-of-stocks or inadequate package or other SKU variety.

Let me be clear: If you think the headwinds facing SAM aren’t real, you aren’t paying attention.

Boston Beer (SAM) – Risks Are Building

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Four items stood out on the SAM 4Q13 conference call – it’s becoming clear that significant risks to the bull case are emerging:

Buyside Notes: If I average out the volume growth over the last 4 December quarters, I come to an expectation of 961,000 barrels (vs a reported 941,000). This was a miss in my eyes; not good for a stock valued at SAM’s multiple.

Buyside Notes: Look for margins to come down. Also not good for a stock valued at SAM’s multiple.

Buyside Notes: Let’s do a quick look-back on the company’s CapEx guidance:

2Q13: “The Company is increasing its 2014 estimated capital expenditure range to between $100 million and $130 million from $30 million to $50 million.”

3Q13: The Company stated that 2014 CapEx would be “between $140 million and $180 million, an increase in the range from the previously communicated estimate of $100 million to $130 million.”

4Q13: “The Company expects to invest between $160 million and $220 million in 2014”

In just 6 months, the CapEx plan has moved from $40MM to $190MM (midpoints). Isn’t it strange that the Company is having such a hard time planning their capital investments? What does this say about management’s forecasting ability?

Note that in 2013, the Company spent $104MM on capital investments so CapEx will ~double Y/Y. Not good for FCF.

Buyside Notes: CapEx is going to eat up their current cash ($50MM at YE13) and their operating cash flow ($100MM in 2013) and the company will likely be borrowing money in 2014 (they have 0 long term debt at YE13). This isn’t a big deal given the strength of their balance sheet, but on the margin increases risks to shareholders.

Boston Beer Company (SAM) CEO Cashing Out

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About a week ago, I wrote SAM up as a short. It’s worth pointing out that Martin Roper, SAM’s CEO, has been selling hand over fist: over $32MM in options exercises and stock sales so far in 2014. Isn’t that a curious thing?

SAM Insider Sales 02 05 14

Boston Beer Company (SAM)

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Boston Beer Company (SAM)
Stock Price: $212
Diluted Shares: 13.5MM
Diluted Market Cap: $2.9BN
Working Capital Surplus: $50MM
Debt: $0
EV: $2.85BN
2013E EBITDA: $150MM
EV / EBITDA Multiple: 19x

I suspect The Boston Beer Company is about to take a dramatic fall. Others – like Off Wall Street – have said similar things. Unfortunately their timing was horrendous as the stock ripped 100 points in the wrong direction. Who says short selling is easy?

But today I believe a fairly significant multiple contraction is underway. For hedgies looking for alpha shorts, SAM presents a very attractive risk-reward.