23: Here's How I Knew Boston Beer Co. (SAM) Was Undervalued
My Deep Dive into Boston Beer (SAM) helped me understand what counts
For the September issue of Watchlist Investing, I did a Deep Dive on Boston Beer Company (Ticker: SAM; Disclosure: Long). I found a founder-led company with a pristine balance sheet and mouthwatering returns on capital trading at a fair price.
Here are the three key metrics I found crucial to understanding this investment:
Key metric #1: How much volume does the brewer produce annually? The larger the brewer, generally, the better its access to volume-driven inputs and distribution advantages. Related, advantages of scale in advertising/brand awareness are tied to volume.
Key metric #2: How much profit per hectoliter (HL) or barrel (BBL) in $ or %? This statistic reflects the company/brand’s ability to price its product and is the result of any economies of scale in production or advertising.
Key metric #3: How much capital is required per hectoliter (HL) or barrel (BBL)?
All three metrics above are largely indifferent to product. Meaning, it’s not so much about the specifics of the company’s brands but rather the volume of total product going out the door and its category-specific pricing limitations. To be sure, product-specific dynamics are important (one can only drink so much hard cider) but those largely reflect management’s ability to stay on top of shifts in consumer preferences, no different than any other competitive industry.
We can see these dynamics play out across SAM, TAP, and BUDFF:
SAM produces far lower volumes of product compared to its larger cousins…
But competing in the high-end beer segment gives SAM the ability to price its products higher, leading to revenues per hectoliter more than double that of BUDFF and well ahead of TAP.
But SAM also has higher input costs stemming from better/premium ingredients, lower relative purchasing power, and lower efficiencies/economies of scale. This leads SAM’s margins to be half of those at BUDFF…
SAM’s lower volumes also manifest itself in lower capital efficiency compared to its larger, mass-producing peers…
All of which combine to result in lower (but by no means unsatisfactory) pre-tax returns on tangible capital…
There’s a lot more that went into the analysis. But hopefully, this helps you understand the beer industry a little more.
Stay rational! - Adam