Boston Beer’s stock price has taken a beating over the past six months, shedding 34.2% of its value and falling to $171.18 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Boston Beer, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Boston Beer Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Boston Beer. Here are three reasons you should be careful with SAM, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Boston Beer struggled to consistently generate demand over the last three years as its sales dropped at a 2.2% annual rate. This was below our standards and is a sign of poor business quality.
2. Shrinking Operating Margin
Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
Looking at the trend in its profitability, Boston Beer’s operating margin decreased by 9.9 percentage points over the last year. Boston Beer’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 4.7%.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Boston Beer’s five-year average ROIC was negative 0.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Boston Beer, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 17.6× forward P/E (or $171.18 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Like More Than Boston Beer
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