Boston Beer Fell Flat on a Hard Seltzer Glut. Its Stock Is Now a Buy.

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Hard seltzer proved to be a bubble that few brewers, analysts, or beverage-industry experts saw going flat.

The reopening of bars and restaurants last summer gave the trendy summer backyard party staple new competition. Retailers and distributors were caught with excess inventories of White Claw, Truly, and other hard seltzer brands they couldn’t sell.

That fizzle whipsawed

Boston Beer

(ticker: SAM), whose Truly brand is the No. 2 player in hard seltzer. Over the past two years, its stock chart has resembled a steeply sloped mountain peak, having closely tracked the hard seltzer hype on the way up and tumbled alongside the ensuing disillusionment. Shares began 2020 in the high $300’s, before a long rally pushed them to above $1,300 last April. Since then, they have fallen nearly 70%, to a recent $419.

Reset expectations and a discounted stock price now make Boston Beer’s stock interesting again.

Founded by Jim Koch in 1984, the company has a history of innovation and of being early to new categories in alcoholic beverages. Its flagship Samuel Adams Boston Lager helped ignite the craft beer revolution, Angry Orchard quickly became the U.S.’s top-selling hard cider brand, and Truly came to market well ahead of hard seltzer offerings from other traditional brewers.

Headquarters:	Boston
Recent Price:	$419.04
YTD Change:	-17%
Market Value (bil):	$5.1
2022E Sales (bil):	$2.3
2022E Net Income (mil):	$209
2022E EPS:	$16.22
2022E P/E:	25.8

E=Estimate

Source: FactSet

All of Boston Beer’s beverage categories come in multiple flavors and varieties that are frequently updated.

The result has been a compound annual revenue growth rate of 12.5% over the past five years, and 16.5% annual earnings per share growth. Those both stand tall compared with rival brewers, and have earned its stock a premium valuation multiple.

Boston Beer shares now go for 25.8 times 2022 estimated earnings, versus an average of about 34 times year-ahead profits over the past half decade. A return to its historical multiple would see the stock rally some 32%, and more gains could be in store if hard seltzer gets its mojo back.

Hard seltzer demand exploded during the pandemic, trending on social media and flowing freely at backyard barbecues and at-home gatherings. Boston Beer was planning for more-than 70% growth in the overall hard seltzer category in 2021. Inventory was built up in anticipation. But the industry and Wall Street analysts alike underestimated how much of a stay-at-home boost hard seltzer had. The rollout of vaccines and widespread relaxation of Covid-19 dining restrictions brought back bars and restaurants as a drinking option for most Americans.

Boston Beer found itself with an oversupply of Truly. Perishable unsold inventory can’t sit in a warehouse forever, and the company said it destroyed millions of cases.

“Because of our higher demand projections earlier in the year and our commitment to avoid the ‘out of stocks’ that we experienced during the summers of 2019 and 2020, we added significant capacity and prebuilt inventories of cans and finished goods to levels that ended up exceeding actual needs as the category slowed down,” Boston Beer CEO Dave Burwick said on the company’s third-quarter earnings call in October. “As a result, we are currently faced with significant temporary costs as we adjust to the new category trends.”

The impact on Boston Beer’s bottom line has been severe: From April 2021 guidance of $22 to $26 in earnings per share last year, management said last month that it now expected earnings to come in between a profit of $1 a share and a loss of $1. Needless to say, that‘s a wide swing for any company over a nine-month period not during an economic crisis.

Hard seltzer category growth ended up around 16% in 2021, according to Nielsen, after gains of 226% in 2019 and 165% in 2020. Truly did much better than the category, growing about 32%—but well off expectations.

Boston Beer management still expects hard seltzer to increase to 15% to 20% of beer dollars spent in the next five years, up from 11% in the first three quarters of 2021 and 9% during the same period in 2020. The company reports its fourth-quarter results on Feb. 16.

RBC Capital Markets analyst Nik Modi sees hard seltzer increasing to as much as 18% of the beer category in a similar time frame, with Truly continuing to gain market share and outgrowing the crowded category. Besides White Claw and Truly, which together made up 68% of sales last year per Nielsen, other brands include

Anheuser-Busch InBev
’s
(BUD) Bud Light hard seltzer,

Constellation Brands

’ (STZ) Corona hard seltzer,

Molson Coors Beverage
’s
(TAP) Vizzy and Topo Chico hard seltzer, and E. & J. Gallo Winery’s High Noon.

“Based on our discussions with retailers, it seems evident that there are a lot of hard seltzer [products on the shelf] that don’t do much and will get cut,” says Modi, who rates Boston Beer stock at the equivalent of a Buy with a $625 price target, or 49% above the current price. “Truly and White Claw will get more shelf space.”

Truly’s comeback depends on flavor innovation and execution, but Boston Beer has a good record there. With its shares relatively cheap, there is now an opportunity to take a sip of Boston Beer stock and whatever the next drink of choice will be.

“Everyone got the forecasting wrong in 2021,” Modi says. “But they’ve managed their entry into hard seltzer and the branding and marketing for Truly very well. That ability to be successful can be applied to other categories too, and that is what you look for as a stock analyst.”

Write to Nicholas Jasinski at [email protected]