Beer can make you do some crazy things.
Investors bidding up the shares of Boston Beer Co. propelled the stock to another record high of $127.98 on Thursday. Someone should cut them off for their own good.
Boston Beer, the brewer of Sam Adams, tells a good story these days. Sales are climbing and profits are growing even faster. It’s the giant among thousands of competitors in the craft brewing market, a small but growing segment of a beer industry suffering overall sales declines.
But Boston Beer stock has become very frothy along the way. The shares are up more than 287 percent over three years, gaining nearly 18 percent so far this year.
More important, Boston Beer shares trade for a bit over 30 times earnings, roughly double the valuation of brewing competitors. One last point of comparison: The Standard & Poor’s 500 index trades at a value of just 13.8 times earnings.
There are many other ways to assess the value of a stock price in relation to a company’s business. It’s safe to say Boston Beer is an expensive stock, no matter how you measure, and investors are depending on more very good news ahead to justify today’s prices.
Craft brewers have delivered a lot of good news in recent years. As a group, their sales measured by volume increased 6 percent in 2009, 13 percent the next year, and 14.5 percent in 2011, according to the trade publication Beer Marketer’s Insights. That growth trajectory looks especially attractive compared to the trend in the broader beer market — down more than 4 percent over the same three years.
Boston Beer executives told stock analysts on the company’s latest quarterly earnings conference call that they saw no evidence that the growth in craft beer sales was slowing down.
“It won’t go on forever and probably when it does hit the wall it will be a rude shock,” Boston Beer chairman and founder Jim Koch told the analysts in May. “But right now it just doesn’t seem to be happening. Craft beer really is the darling of the alcoholic beverage industry at this moment.”
Boston Beer commands about 17 percent of that market, which is densely populated by small regional competitors. Sierra Nevada, the second-largest craft brewer, accounts for about 7 percent of the market.
Boston Beer’s business grew with the fortunes of the craft brew market it dominates. In fact, the company has exceeded financial forecasts for each of the past three quarters.
Consider Boston Beer’s performance during the first three months of the year, always the industry’s slowest quarter on the calendar. Net revenues grew about 10 percent to $113 million. But profits soared by nearly 90 percent, to $7.5 million, thanks to more efficient production and relatively modest increases in overhead costs.
Boston Beer continues to forecast a more modest overall profit growth rate this year, estimating an earnings range of $3.80 to $4.20 per share. Profits of $4 per share would represent a 7 percent increase over comparable earnings for 2011.
So why do investors want to pay so much for shares of a company with profit growth prospects of just 7 percent? The simple answer is that they don’t.
Consensus earnings forecasts by stock analysts anticipate profits of $4.21 per share, which would be about 13 percent more than Boston Beer made in 2011. Growth like that is nothing to sneeze at in a slow economy.
But is it worth the kind of money Boston Beer shares command today? It’s hard to make that math work and some investors have come to the same conclusion.
While buyers bid the price of Boston Beer shares higher, a crowd of other investors is selling the stock short in a bet it will lose value. They’ve made that wager with more than 3.1 million shares — a whopping 37 percent of all Boston Beer stock available to trade.
Boston Beer and the craft brewing business have a lot to cheer about. But beer fans — investors or drinkers — should know when they’ve had enough.
The Red Herring
Mutual fund managers Will Danoff and Joel Tillinghast, the biggest stars in the Fidelity Investments stable, both had good luck in retailing Thursday. Danoff’s Fidelity Contrafund owns 5 percent of TJX Cos., the Framingham retailer that set a record stock high Thursday. Tillinghast’s Low-Priced Stock fund owns 5.5 percent of Ross Stores Inc., an off-price competitor that jumped to within $1.01 per share of a new record stock high.