Source: Getty Images.
Back in August, I wrote a theoretical article as to how craft brewing heavyweight Boston Beer Company (SAM -2.04%) could re-ignite its growth engine. My suggestion did not revolve around initiating new product lines or expanding their distribution network. I felt them, as I feel now, but Boston beer needs to act as a home for tiny craft brewers failing to stand up against the goliath that is a B in Bev. My suggestion, which almost certainly never made it to the desk of Boston Beer's CEO Jim Koch, was never likely to come to fruition. A man can dream. And while I do have grave concerns as to the future of Boston Beer, indeed of the craft brewing industry itself, I still have tremendous respect for the trend which Boston beer arguably started.
It's not easy to find a company as profitable as Boston Beer, let alone one whose heart and soul you deeply respect. Which of course demands an answer to the question: should I give in, despite my misgivings, and buy shares after their modest pull back of the past 12-months? Alas, for two very strong reasons, the answer appears to be a morose 'no'.
Valuation
Let's cover the bad news first. Boston beer shares are expensive. The company is projected to earn approximately $6.50 per-share in fiscal year 2017. With the share price at around $170 per share, this puts its forward P/E ratio at something like 26 times -- more or less the valuation assigned to Internet search monopoly alphabet. I don't know about you but if I'm going to be paying 26 times earnings for a business it had better be iron-clad and still growing. Analyst pulled by S&P Global market intelligence think that Boston beers long-term growth rate is somewhere around 10 to 12%. Decent but not eye-popping.
That's the bad news.
The good news is that Boston beers valuation has come back in recent years and currently sits at its lowest level in recent memory:
SAM PE Ratio (TTM) data by YCharts
Is a historically "cheap valuation" good enough to warrant picking up a few shares? Probably not.
Some simple back of the envelope analysis shows that Boston beer currently trades for a forward earnings yield of 3.8% (1 / 26). It is just one metric of many that paint the picture one should create in deciding to buy or sell a stock, but this does not compare well to Google, or even any of the many stocks out they are yielding 5% or more.
Any stroll through your local grocery stores' beer section will tell you that Sam Adams is being given a run for his money. It has nothing to do with beer quality. It has nothing to do with Hobbs. It has everything to do with the relentless competition in the craft beer market today:
Source: Brewers Association.
Recent statistics are just as disheartening:
Source: Brewers Association.
There is only one way this ends. And it is not good for Boston Beer. Just ask anyone that opened up a Beanie Baby store in the 1990's.
Foolish final thoughts
Boston beer has a great future ahead of it. Full of product innovations, continued profits, and a legacy that will last a long time. Unfortunately, investing often comes down to timing and buying some thing for less than it is worth. I love a good cold Boston logger, I have tremendous respect for Boston beer, but for these two very strong reasons now is not the time to step up and invest in what I love. Here's to being given the opportunity someday. Cheers.
