Is Boston Beer Planning for a Big Drop in Sales?

By Markets

Boston Beer investors might not be smiling after the craft beer brewer reports earnings this week that could send its stock price lower. Management appears to be ready to scoop up shares if that happens. Image source: Getty Images.

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Should Boston Beer (NYSE: SAM) investors be worried the brewer is about to fall flat when it reports earnings on Thursday? Its recent stock buyback authorization suggests that may be a possibility.

Stocking up on its stock

The maker of Samuel Adams beer, Angry Orchard cider, and Twisted Tea has historically never been a big buyer of its own stock. According to Barron's, analysts at Cowen & Co. say that the five-year period between 2010 and 2014 saw Boston Beer buy back $37 million worth of its shares. But last year it suddenly bought $136 million worth and through the first half of 2016 has repurchased another $125 million of its stock.

It looks like it has big plans to buy again, since just ahead of its third-quarter earnings report, the brewer announced its was hiking its stock repurchase program by $180 million, raising the total spending limit from $601 million to $781 million. That may be a sign it thinks its stock is about to get a whole lot cheaper real soon.

In January 2015, Boston Beer's stock peaked at a record $325 per share, and since then has been on an inexorable slide lower to the point where it now trades for half the value it did back at its high point. The massive repurchase of shares hasn't been able to prop up its stock or earnings, though it has been buying them back at progressively lower prices.

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SAM data by YCharts.

No longer a frothy head

Arguably Boston Beer remains the face of the craft beer industry. Despite its growth over the years, the Brewers Association trade group has moved the goalposts on occasion to ensure that its most famous member can still be included.

And with good reason. It was Samuel Adams beer that really helped craft beer go mainstream to the point where the industry now accounts for 12% of all the beer brewed in the U.S., some 24 million barrels in all. Where the overall beer market grew just 0.2% in 2015, craft beer jumped almost 13% from the prior-year period.

Image source: Getty Images.

Yet as Boston Beer's earnings attest, the industry is starting to slow. The Brewers Association's midyear reckoning showed that production volume rose 8% over the first six months of 2016, about half the rate of increase seen a year ago, and some analysts think it's even lower.

While the slowdown can be attributed to Samuel Adams underperformance, along with other mass-brewed "craft beers" from Anheuser-Busch InBev, Molson Coors, and others also seeing sales weakening, it indicates Boston Beer is still facing headwinds.

Some hard choices

But what's proving more problematic for Boston Beer is the turbulence it's seeing in cider, and maybe also its recent new product introductions, hard soda and hard seltzer. In the second quarter, depletions fell 5% from last year as Samuel Adams, Angry Orchard, and the Travelers brand all suffered. Though the company said the back half of the year should see more favorable comparisons, and it will have contributions from its Coney Island brand of hard soda and the Truly Spiked & Sparkling seltzer line,analysts think the fanfare from these beverages is already fading.

Since these new brands were supposed to provide some ballast for the brewer as it works to get its flagship Samuel Adams brand back on track, the new stock buyback plan may suggest management thinks it's going to take more time than they thought, and that the market isn't going to like what it has to say.

There doesn't appear to be any way Boston Beer can turn the ship around. Craft beer drinkers are still drinking craft beer, but they're buying the ones that are true small-batch brews. Industry observers noted when you removed the biggest names from the list, the craft beer industry was still chugging along at 16% growth.

So don't be surprised when Boston Beer reports its third-quarter numbers this week and sales are flatter than a day-old open long neck. It may once again have the chance to buy its stock at a discount, but just because the brewer is doing so, doesn't mean you have to buy them as well. There will probably be plenty of opportunity in the months ahead to gets Boston Beer's shares at an even better price.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV and Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.