Boston Beer (SAM) may be best known as the brewer of Samuel Adams lager. Yet it’s been its involvement in the hard seltzer business that’s been the main driver of SAM stock. That’s in a good way and in a bad way.
Strong revenue and earnings results, driven largely by the success of its hard seltzer brand Truly, enabled shares to zoom from just over $400 per share, to as much as $1,349.98 per share, between April 2020 and April 2021. However, since then, Truly has been having the opposite effect on shares, as disappointment over slowing sales growth for the beverage has fueled a big stock price decline.
Sliding since the spring, the sell-off became more severe when the company first began to walk back projections. In the months that followed, the situation became worse, as Boston withdrew its guidance.
After briefly falling below $500 per share, it may appear to have found support, especially as it’s tried to bounce back in recent days. Yet it still might not be the time to buy it. Despite its diminishing status as a growth stock, it’s still priced like one. At around $539 per share, still well above a reasonable valuation, I am bearish on the stock.
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SAM Stock, its Hard Seltzer Selloff, and What’s Next
Pandemic tailwinds to some extent sparked the incredible run Boston Beer went on from spring 2020 to spring 2021, but it was the success of Truly that turned this into a hot growth stock.
With expectations that a move into hard seltzer and similar products would enable it to sustain above-average rates of revenue/earnings growth, investors dived into it. However, as they’ve seen over the past few months, the results have failed to match expectations.
With hard seltzer looking less like a disruptor in the adult beverage market, the market has reassessed its valuation of SAM stock. Unfortunately, said reassessment may not yet be over.
At its 52-week high, the stock traded at a high-double digit P/E ratio, which in hindsight was not sustainable. Shares may be a lot cheaper now than they were six months ago. Nonetheless, as it loses its luster as a growth stock, SAM may be at risk of falling to a valuation similar to that of its larger, slower-growing peers.
Still Pricey, Compared to Peers
Given its severe price decline, and the signs its showing of bottoming out, some may see today as the time to dive back into SAM stock. First, they should take a look at its valuation, and keep in mind the prospects of growth coming to a halt. It’s clear shares have a way to go before you can consider them “cheap” or oversold.
What do I mean? At present prices, Boston Beer trades at a forward price-to-earnings, or P/E, ratio of 31.4x. Some may argue that’s reasonable for a growth stock. Yet as it’s losing this status, a reversion to the mean may be in the cards.
In other words, it might see further contraction of its valuation, more on par with direct publicly-traded peers. For example, Anheuser-Busch InBev (BUD), which trades for a forward P/E ratio of 19.5x. Or Molson Coors (TAP), which trades for just 11.5x earnings.
This points to shares having plenty more room to fall before calling it “oversold” becomes justified. That’s not to say its P/E will fall to 10x-15x, like Molson Coors. However, a move to valuation similar to that of BUD stock (around 20x) would still result in another big decline in price.
What Analysts are Saying about SAM Stock
According to TipRanks, SAM stock has a consensus rating of Moderate Buy. Out of 13 analyst ratings, 6 rate it a Buy, 5 analysts rate it a Hold, and 2 analysts rate it a Sell.
As for price targets, the average Boston Beer price target today is $636.92 per share, implying around 18.2% in upside from today’s prices. Analyst price targets range from a low of $400 per share, to a high of $965 per share.
Bottom Line: Investors Should Wait for Further Developments with Boston Beer
Admittedly, there are still some possible developments that could help Boston Beer continue its nascent rebound. Subsequent results could show that the slowdown in sales/growth isn’t as severe as expected. Also, as a takeover target for one of the larger rivals, a buyout offer at a rich premium could also come out of left field.
Nevertheless, until there’s more clarity about its upcoming results, or until it falls to a more reasonable valuation, investors may want to sit out on SAM Stock.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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