Boston Beer: Does Stock Momentum Outweigh Expensive Valuation?

Boston Beer Company Inc SAM shares have rallied strongly since late July, prompting an analyst to settle at a Neutral view on the stock, given his belief that revenue momentum neutralizes the stock's high valuation.

The view comes close on heels of JPMorgan's downgrade of Anheuser Busch Inbev NV (ADR) BUD, which was based on a view Anheuser's period of above-average growth may be fading.

The Analyst

Stifel analyst Mark Swartzberg initiated coverage of Boston Beer with a Hold rating and $166 price target.

The Thesis

The rally in the parent company of the Sam Adams brand seen since summer has been due to takeout speculation and a return to volume growth in IRI-tracked channels after over a year of volume contraction, Swartzberg said in a Tuesday note. (See Swartzberg's track record here.)

Although revenue momentum has prevented the analyst from starting at a Sell, he said shares are expensive, given that a takeout may not materialize.

Improving trends could be fleeting and brewing utilization may pressure margins as volume weaken, Swartzberg said. And the CEO transition compounds the risk of fundamental disappointment, especially if improvement is short-lived, he said.

The Stifel analyst expressed concerns about the company's big brewing footprint, as it invested heavily in new capacity and refitted existing capacity to handle the complexity of non-traditional brewing formats due to faster-than-expected growth between 2011 and 2014.

Instead of focusing on day-to-day cost management, the company realigned priorities in favor of satisfying wholesaler demand, resulting in inefficiencies, Swartzberg said.