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Raise a Glass With SAM

Those looking for some small-cap speculation might want to drink in the profits that Boston Beer is brewing up.
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Can you name a stock that's up more than 400% since the March 2009 bottom that isn't tech related? Well, lots of stocks in the "affordable luxury" segment are up 400%. Companies such as Coach (COH), Ralph Lauren (RL), Estee Lauder (EL) and Starbucks (SBUX) are all up 400% or more. One small-cap name that is up over 400% (that nobody mentions) is The Boston Beer Company (SAM). While the other companies I mentioned have global reach and are expanding into China, couldn't Boston Beer, maker of Sam Adams Beer and king of the craft beer craze, be considered a "mini" affordable luxury name?

Founded in 1984 by former lawyer Jim Koch, Boston Beer has become the largest craft brewer and sixth largest brewery overall in the U.S. The company sells approximately 50 beers under the Samuel Adams brand name as well as  seven flavored malt beverages under the Twisted Teas brand name and three hard-cider beverages under the HardCore brand. In 2010, Standard & Poor's estimated the company held a 21% market share of the "super premium" beer market. Overall, Samuel Adams has been ranked third in the category for the last five years after imports Corona and Heineken.

After a brief dip into the mid-single digits (5%-6%) in 2008 and 2009, growth in the super-premium beer category reaccelerated in 2010. The category grew 11% in 2010 and again in 2011 and beer makers are expecting another strong year of double-digit growth in 2012. SAM has managed to grow volume and increase pricing, while taking market share in a brutally competitive market. The company's operating margin bottomed out at a dismal 3.5% after a disastrous 2008. (There was a glass-bottle recall in 2008 and expenses went through the roof after the company bought a brewery in Pennsylvania.) But things are under control now and the company's operating margin and gross margin have rebounded. The company reported a 20% operating margin and a 55% gross margin in fiscal year 2011.

Trading at 23x the Street EPS estimate of $4.14 (for fiscal year 2012), the stock is considered expensive and has caught a few "sell" recommendations from analysts. But they are looking at the company as a traditional brewer. Analysts are worried about commodity prices and volume shipments.

But I don't think Boston Beer shouldn't be valued like a traditional beer company. To me, SAM is in the affordable luxury category. And, if investors decide it's in that category, they will just about pay anything for the stock. SAM is taking market share, has pricing power and has earnings momentum.

So, the next time you are looking to add some small-cap speculation to your portfolio, you might want to drink in the profits that Boston Beer is brewing up.

At the time of publication, Laudani had no positions in any of the stocks mentioned.