Boston Beer (SAM) is one of the largest craft brewers in the United States, of which Samuel Adams is probably its most famous brand. SAM has been positioning itself in the higher-end ‘better beer’ category, focusing on better quality and taste compared to other domestic beers.


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Source: stockcharts.com

The 2016 financials are in!

The company’s total revenue decreased in 2016, despite a year with 53 reportable weeks (compared to just 52 weeks in a normal year). The net revenue was $906M, but as the cost of goods sold also decreased rather substantially, the gross profit came in at $460M, down from $502M in 2015 and $465M in 2014.
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Source: financial statements

Fortunately the company was also able to save on advertising and selling expenses and although the G&A expenses increased by almost 10%, the total operating expenses fell by 7%, resulting in an operating income of $138M. Again, this was substantially lower than the operating income of the previous two years. The net income dropped to $87M, which works out to be $6.93/share thanks to the mitigating impact from a substantial share buyback program. Without this repurchase program, the EPS would very likely have been just $6.6-6.7/share.

So, a net income of $87M isn’t too great for a company with a market cap of $1.7B, but perhaps the free cash flow results are providing a better reason why this company should be trading at the current valuation.

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Source: SEC filings

The operating cash flow was $154.2M, but after deducting the changes in its working capital position, Boston Beer’s adjusted operating cash flow was approximately $139M, which definitely covered the $50M in capital expenditures. This allowed Boston Beer to report a full-year free cash flow of $89M. Slightly higher than its net income, but definitely not a ‘wow’-result. And if the company wouldn’t have deferred some of its taxes, the net free cash flow would have been just $81M.

That being said, you can definitely see the improvement in Boston Beer’s results. Whereas the adjusted operating cash flow was just $133M in 2014 and $140.6M in 2015, the decline in 2016 isn’t as ‘dramatic’ as the net profit decrease. You should also notice the continuous decrease in SAM’s capital expenditures, which paves the way for shareholder rewards.

The free cash flow allows Boston Beer to strengthen its balance sheet during a difficult year

And indeed, in 2016, Boston Beer spent approximately $165M on share buybacks to mitigate the impact from option exercises (which brought in an additional $40M, for a net amount spent on repurchases of $124.5M).

Those shares were repurchased at an average price of almost $171/share (the company didn’t step up its buying pace when the share price dipped towards the $150-level in the second quarter of last year), and given the current low share price, a new buyback program would be much more effective (SAM will be able to buy back more stock for the same dollar amount).

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Source: Ycharts.com

But of course, one must have the financial ability to do so. And after a relatively weak 2016, Boston Beer reported on a continuous lower demand for its product. In the first six weeks of the year, depletions were 15% lower compared to the previous year, and as such, its EPS target of $4.2-6.2 could be way off (the spread between the lower end and higher end of the guidance is one of the highest we have ever seen. SAM basically says it has no clue how the company will perform this year).

That being said, Boston Beer thinks the demand will pick up later this year, and is now aiming for a total sales volume which will be between 7% lower and 1% higher compared to the previous financial year. SAM also thinks it will be able to sell its beer at a 1-2% higher price, so this should mitigate the impact of the potentially lower production volumes. That being said, SAM also expects to increase its promotional efforts by $20-30M, and this will have a huge impact on the net income and the cash flow statements.

Considering SAM had a pre-tax income of $137M in 2016, spending $25M on additional promotion campaigns will reduce the pre-tax income by almost 20%, and reduce the adjusted free cash flow to just $65-70M (assuming a stable capex, which is the mid-point of Boston Beer’s guidance).

Investment thesis

Boston Beer’s share price has fallen by approximately 25%, but the company is still quite expensive. Even if the revenue remains stable (although it’s likely it will continue to decrease), the free cash flow result will fall by roughly 20%. And even if SAM would spend the entire $65M on share repurchases (to buy back a net amount of 350,000 shares), the free cash flow yield would still be just 4% based on a FCF/share of $5.65.

Boston Beer seems to be a contrarian investment, betting on the company being able to return to growth. But value investors should just move along.

Disclosure: the author has no position in Boston Beer, but could be interested around the $100-level, if it would ever get there.

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