Overvalued Company of the Week – Boston Beer Company (SAM)

The overvalued company of the week is Boston Beer Company Incorporated (SAM), the brewer and seller of brands of beer including Samuel Adams. We will analyze using Warren Buffett’s approach for the Business and Management Review as well use Benjamin Graham’s model of valuation of a company.

Business and Management Review

1) Is the business simple and understandable?

     Boston Beer has a very simple and understandable business model, as they manufacture and distribute alcoholic beverages to liquor stores, grocery chains, and restaurants and bar’s.

2) Does the business have a consistent operating history?

     Boston Beer has had troubles in recent years as the influx of micro-breweries has taken a more aggressive approach in marketing their products and distinguishing themselves from the larger breweries. Regional micro-breweries where once localized, but they are quickly expanding as the American public’s preferences have changed. Boston Beer’s main product line, Samuel Adams, has attempted to distance itself from the larger beers including Budweiser and Miller Light, but more and more they are becoming synonymous.

3) Does the business have favorable long term prospects?

     With the above mentioned increased competition it seems that Boston Beer will struggle to maintain the niche clientele they have enjoyed in the past. However, if Boston Beer could begin to try to introduce variations of their signature product line they could begin to shorten the separation between them and the micro’s in the astute consumer’s mind.  

4) Is management rational?

     We feel there is an issue that the founder is still the chairman of the board as this may hamper the ability for Boston Beer to grow into a more mature company. Of course it is always favorable to have the influence of the founder to keep the integrity of the company intact, but at the same time it is common for them to think of the company as their “baby”. Also, the fact that he served as chairman and CEO up until 2001 further my thinking that Mr. Koch has problems with delegating control. We think the commercial aspect having Mr. Koch the spokesman of the company is a fabulous idea, but again we think that the company needs to clean house and bring in seasoned executives with proven track records.

5) Is management candid with its shareholders?

     Boston Beer is very candid as its main webpage is completely devoted to investor information. At first though I went to Samuel Adams webpage hoping for a link back to the corporate page, but was unable to find one. Overall, though, the company presents all facts publicly available nicely for its shareholders.

6) Does management resist the institutional imperative?

     From the above mentioned about Mr. Koch we wonder if Boston Beer is in fact falling victim to the institutional imperative. In our opinion the facts add up too heavily that, no, they do not resist this temptation.

Financial and Value Review

Boston Beer Company does not meet the criteria for either the defensive or enterprising investor. With a (see Our Methods) P/E ratio of roughly 42 we feel the company is overpriced given the earnings. With sales growth averaging a lackluster 4.57% over the past five years, as well net income growth of 6.72% we find the numbers unjustifiable for the high current share price. We further find that the company is selling for over 300% of its intrinsic value.

We would not feel comfortable paying more than $11.00/share for Boston Beer Company.

Neither of us held a position in Boston Beer Company at time of publication. Please review our disclaimer, and our methods.



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