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SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk

Takeaway: Trade around today's weakness

Generally it is hard to poke any holes in the third quarter’s results:  SAM beat top and bottom line consensus expectations on double digit growth versus the previous-year quarter.  The stock is taking a hit this morning on management narrowing its FY 2013 guidance by 5 cents to $5.05 – $5.35 versus $5.10 - $5.40. We think the move is overdone. 

We remain bullish on SAM into year-end, however cognizant that the stock is up on a rope: +78% YTD and +38% over the last three months, and is expensive with a P/E of 40.4x vs a peer average of 23.3x. That said, we see 2014 as a very balanced year for SAM to meet and beat expectations on strong healthy growth from Sam Adams and continued support from Twisted Tea and Angry Orchard. We expect the company’s increased cap-ex spend to build brewery capacity (including a new bottling and can line, announced last quarter) to boost 2014 shipping volumes and reverse recent bottle necks resulting from overcapacity and the higher costs associated with using third party breweries.  The company raised depletion trends for FY13 to 21-24% vs previous guidance of 17-22%, and we expect the trend of superior growth of top craft brewers, in which SAM is a leader, to continue over the medium term.

From a quantitative perspective, we’d be buyers of SAM above our intermediate term TREND level of support at $220. Today the stock broke through its previous immediate term TRADE level of support at $246 to become its new line of resistance.

SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk - zz. sam levels

SAM - Hard to Argue with Results – But Up on a Rope Remains A Risk - zz. sam

What We Liked:

  • Net revenue of $216.4MM beat consensus of $200.4MM, an increase of $50.0 million or 30% over the same period last year
  • Net income for the third quarter was $25.7 million, or $1.89 per diluted share that beat consensus at $1.82, an increase of $4.9 million or $0.36per diluted share from the third quarter of 2012, an increase of 24%
  • Depletions growth of 26% in the quarter, from growth in Sam Adams, Twisted Tea, and Angry Orchard
  • FY 2013 depletion trends raised to 21-24% vs previous guidance of 17 – 22%
  • FY 2013 capital spending estimate narrowed to $100MM to $120MM vs previous guidance of $100MM to $140MM
  • Maintained its FY gross margin range of between 52% and 54%
  • Expects price increase of ~ 1% in Q4 to offset higher input and labor costs
  • Tax rate of 38% for FY
  • On Industry Trends: Jim Koch said he’s seeing some signs of variety fatigue with retailers, who are choosing to stick with well defined crafts with high consumer awareness and appeal. From the retailer’s side, this also prevents staff confusion and kegs that don’t turn quickly enough.   Broadly he sees the variety in craft, citing 2-3 new craft breweries opening every day in the U.S., as a positive sign for growth in the category.

What We Didn’t Like:

  • FY 2013 EPS are now estimated to be between $5.05 to $5.35, a decrease from the previously range of $5.10 to $5.40 due to the land write-down and increased brand investments that are estimated to be partially offset by increased shipment volumes
  • In the quarter, Gross Margin declined to 53% vs 56% in the year-ago quarter, on increased brewing costs, higher ingredient costs, and product mix effects 

Matthew Hedrick

Associate