Investment in Boston Beer Company doesn’t come without risks. There are four major risks that could negatively impact returns for investors: financial valuations, poor economic growth, increased industry competition, and higher input costs.
The market isn’t blind to Boston Beer Company’s high growth. So investors are paying a higher multiple compared to peers. On a price-to-earnings metric, the company’s forward P/E ratio stands at 38.9x based on sales growth of 16.85% and net income growth of 18.88% from 2013’s estimated full year. The market is likely putting a premium on Boston Beer Company current year’s solid growth. If actual results trail estimates, share price could be negatively affected.
Sensitive to economic conditions
Since “better beers” sell at higher prices than average beers, they’re subject to economic growth and the labor market. Poor economic conditions like in 2008 will negatively impact earnings and sales at Boston Beer Company, as consumers aren’t willing to spend much on pricier items. Some existing consumers may even trade down to lower-priced alternatives. On a more short to medium timeframe, consumer sentiment may affect growth rates and share price appreciation.
Lastly, the cost of feed stock is always a risk to lower earnings. If weather somewhat disrupts overall industry supply in the future, Boston Beer Company’s margins will be pressured. This is particularly true if beer companies can’t pass on the higher costs to consumers.
As the overall beer segment is showing weakness and the craft beer segment is showing strong momentum, new entrants could try to grab some of the market share. Competition from existing players like Anheuyser Busch Index SA (BUD) and MillerCoors, a joint venture of SABMiller (SBMRY) and Molson Coors Brewing (TAP), could also intensify. This risk may be less significant, because MillerCoors and BUD’s products aren’t officially classified as craft beers.
To be a craft beer producer, annual production must be less than 6 million barrels, the company must be less than 25% owned or controlled by an alcoholic beverage industry member that isn’t a craft brewer, and it must have “all malt flagship or has at least 50% of its volume in either all malt beers or in beers which use adjuncts to enhance rather than lighten flavor,” according to the Brewers Association. Because of the second rule, large producers’ craft beers are often referred to as “crafty beer.” Nonetheless, these large producers can get around that hurdle through cunning advertising tactics. Competition from wine and spirits could add pressure as well.
So does Boston Beer Company really offer a superior product? Why not try some for yourself and see if you or your friends like it?