SAM reported strong Q2 results, growing diluted EPS of $1.88 by 29.6% Y/Y above sales growth of 27.7%, or $231.6M (versus our estimate of $226.7M). The company achieved record depletion rates of 23% in the quarter on strength from its Samuel Adams, Angry Orchard and Twisted Tea brands.
The company continues to show prudence in its capital allocation and long-term strategy to invest to grow – we’d expect investors will applaud the narrowing of its FY 2014 capital spend (mostly to increase production), the reaffirming of guidance, and the growth response from its main brands to increased investments in media, local marketing and point of sale, and increased sales force.
The strength in the craft beer category, with 1H volumes up +18% Y/Y, and consumer trends towards “local” stand as headwinds to SAM moving forward, yet the company didn’t show it in the quarter. Tougher 2H comps, increases in freight and ingredient costs, and less product launches (most of the new offerings for the year were loaded into Q1 2014, including Samuel Adams Summer Ale and Samuel Adams Rebel IPA) pose threats to profitability in 2H, yet we expect this very rich stock to grind higher over the summer months on an existing pallet of stability.
Below we provide our update quantitative levels that show the stock trading in a bullish formation over the intermediate term TREND duration.
What We Liked
- FY 2014 estimated depletions growth increased to between 20% and 24% versus previously guidance of 16% to 20%
- FY 2014 GM estimate maintained between 51% and 53%
- FY 2014 diluted EPS reaffirmed at $6.00 to $6.40
- FY 2014 capital spending estimate narrowed to between $160 million to $185 millionversus previous guidance of $160M to $220M
- FY 2014 national price increases of approximately 2% reaffirmed
What We Didn’t Like
- In the quarter, GM decreased 50bps to 53.1% Y/Y on product mix effects and increases in packaging and ingredient costs that were only partially offset by pricing
- In the quarter, supply chain performance still remains under pressure with the opportunity for the company to improve operating costs. Certainly higher freight costs pose a threat to profitability but we’re bullish on SAM’s ability to better integrate its breweries as it moves further through its expansion projects
Howard Penney
Managing Director
Matt Hedrick
Associate
Fred Masotta
Analyst
