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Beer buzz: Is SAM a buy?

Monday - 7/23/2012, 2:12pm  ET

I’ve long been a connoisseur of dark beer, particularly lagers and especially those brewed by Boston Beer Company under its Samuel Adams brand name. While my friends typically consume a light beer, I go against the grain and order a 16-oz Boston Lager every time. Boston Lager was voted “Best Beer in America” at the American Beer Festival in 1985.

I usually buy stocks of companies whose products that I know well and consume regularly. 

So I thought: why not investigate buying SAM?

It has many good fundamentals such as a solid 30% earnings per share growth over the last 5 years which has outpaced most others in the beverage industry, projected 9% EPS growth over the next 3 to 5 years, no debt, strong return on investment at 34%, low volatility, a well diversified product line (including 39 types of beer, 7 types of malt beverages under the Twisted Tea brand name, 4 types of hard ciders under the Angry Orchard and Hard Core brand names), a great management team and a #1 ranking by sales in the craft brew industry.

 

Source: Samuel Adams Beer Guide April 17, 2011

 

Some things going against buying the stock at this point include a relatively high P/E ratio of 23, albeit down from the 5-year average of 29, a recent analyst downgrade, an elevated market-to-book ratio and the fact that it sells its products primarily in the United States although the U.S. is not currently in the top ten in beer consumption. This could be an issue if there was a downturn in the U.S. anytime soon, although all brewers probably would experience a drop-off based upon what happened during the financial crisis of 2008 to 2009.

 

Source:  Kirin Holdings Beer Consumption Statistics Statements April 17, 2011

 

Intangibles to consider include the distinctive and innovative mug designed by Boston Beer to fully enjoy the product. I personally have a set of 6. They offer a great tour, and you can sample some of the product at its conclusion, at the R&D facility in Boston. The beer is actually brewed in Ohio and Pennsylvania. A great initiative sponsored by Boston Beer, the Longshot Competition, which encourages up and comers in the craft brewing business, is also a positive for the company.

I also looked at three competitors to Boston Beer.

In the craft beer space is Craft Brew Alliance . It is a smaller company ($159.4M market cap vs. $1.44B), a bit less expensive (a P/E of 15.4), has some debt (debt/equity = 0.13), gross margin of greater than 30%, and a somewhat lower return on investment. Sales ($155.4M) are about a 1/3 of that for Boston Beer.

Another competitor is Companhia de Bebidas Das Americas which will provide some exposure outside the U.S. It has some fundamentals that are similar to Boston Beer including a P/E of about 26, a high gross margin (67%), and return on investment of 29%. It has a market cap of around $117B and has a dividend yield of around 0.4%. It has some debt (debt/equity = 0.14) and projected EPS growth is about 7% over the next 3 to 5 years.

The granddaddy of brewers, Anheuser-Busch InBev , should also be looked at it. It has a reasonable valuation with a P/E of 19, gross margin over 57%, projected EPS growth over the next 3 to 5 years (11%) that is slightly greater than SAM and a decent dividend yield of 2%. It is a bit more volatile than SAM. Its market cap is about 100 times larger than SAM at $125B and it offers a more diversified, world-wide product lineup of about 200 different types of beer, including Budweiser, Stella Artois, Leffe, Hoegaarden, Bud Light, Michelob, Skol, Brahma, Antarctica, Quilmes, Jupiler, Hasseroder, Klinskoye, Sibirskaya Korona, Chernigivske, Harbin, and Sedrin. 

Unless you have a strong need to diversify geographically, enjoy the Craft Brew Alliance product more than Boston Beer's, like to stick with large cap stocks or need to hold a stock that pays a dividend then the buzz on SAM may add up to a buy.

Cheers.

This article was originally published as Beer Buzz: Is SAM a buy?on Fool.com

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