Sam Adams tasty in your portfolio?

The brewer reported strong earnings in the third quarter. But will the high share price leave you with a hangover?

By Benzinga Nov 2, 2011 6:40PM

By Jonathan Chen, Benzinga Staff Writer


Boston Beer (SAM) hopped past analyst expectations with its quarterly earnings and raised full-year guidance significantly, sending shares soaring Wednesday.


The Boston brewer, which makes more than 25 styles of beer, reported third-quarter profit of $1.19 per share on $134.8 million in revenue. Wall Street analysts had expected $1.10 per share on $131.9 million in revenue.


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The company also raised 2011 guidance, saying it now expects earnings of $3.60 to $3.90 per share. This was up sharply from its previous guidance of $3.20 to $3.60 per share. Wall Street expects full year earnings of $3.36 per share.


That helped send shares up almost 15% Wednesday to close at $99.01.


Analysts at Auriga were particularly impressed by the quarter and raised the firm's price target to $92 from $79. Still, Auriga reiterated its hold rating because of the sharp share price appreciation.


"Shipments and depletions improved in 3Q11, putting the company on sounder footing for the fourth quarter and into 2012," Auriga analysts wrote in a note to clients. The analysts raised their per-share profit forecast for Boston Beer to $1.16 for the fourth quarter and $3.72 for the full year from 81 cents and $3.28, respectively. They also raised the per-share profit estimate for the 2012 fiscal year to $4.16 from $3.57.


Boston Beer has aggressively repurchased its shares under a $275 million buyback program. It purchased 611,000 shares for $50.9 million in the first three quarters, for an average price of $83.30. The company also said that it has purchased 125,000 shares so far in the fourth quarter, for an average price of $76.80.


This shows that Boston Beer has been effective with its capital, and is not using its share buyback poorly, but extremely effectively.


The company does have to worry about higher barley costs, higher freight costs, and the ability to pass these costs on, but has said it will be able to do so. Goldman Sachs was a little less positive on this front, and kept its rating at neutral despite the sharp earnings beat and guidance raise.


In a research report, Goldman wrote that 2012 profit will hinge mainly on the company's ability to use pricing to offset rising barley costs.


With a forward earnings multiple of just over 25 times 2012 estimates, Boston Beer is getting a little expensive to its historical valuation of 22 times earnings. Revenue is growing 8% year-over-year -- not exactly incredibly strong, but much healthier than Molson Coors (TAP), Anheuser-Busch InBev (BUD) and the rest of the industry.


We are in peak beer-drinking season, with football, the holidays and New Year approaching. Shares of Boston Beer may pull back slightly, but it has historically been afforded the best multiple in the group, so any deep pullback could be bought.


Earnings from Boston Beer have proved to rich and fulfilling, and that may leave your portfolio "hopped up" on profits.


ACTION ITEMS:

Bullish:
Traders who believe that sales of Sam Adams, Boston Beer's main beer will continue to be strong might want to consider the following trades:

  • Shares are slightly expensive here, trading at 25 times 2012 earnings. They could see an uptick if their Freshest Beer Program continues to perform.

Bearish:
Traders who believe that Boston Beer is overpriced here may consider alternate positions:

  • Shares are currently trading above historical norms. They will eventually pull back at some point. Traders may want to take profits, and short until shares hit the 22 times earnings it has historically traded at. 

Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security. 


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