Truly Hard Seltzer Positions Boston Beer For Upside, Credit Suisse Says In Double Upgrade

Sam Adams parent company Boston Beer Company Inc SAM could see notable upside from the growth and "staying power" of hard seltzer, according to Credit Suisse.

The Boston Beer Analyst

Kaumil Gajrawala upgraded Boston Beer from Neutral to Outperform with a price target lifted from $400 to $525.

The Boston Beer Thesis

Boston Beer is the second-largest player in the fast-growing hard seltzer market, with a 26% market share, Gajrawala said in the Tuesday upgrade note.

The company's Truly Hard Seltzer brand offers investors the "cleanest way" to gain exposure to what is considered the "undisputed star of beer," the analyst said.

The hard seltzer category has been growing at a rate of 150% since the end of 2017, reached a 5% value share of beer in 2019 and helped beer companies show revenue growth despite flat volumes, according to Credit Suisse.

Assuming the seltzer category continues to grow, Gajrawala made a series of assumptions on how it could impact Boston Beer's bottom line: 

• Truly volume decelerates from 200% over the past 52 weeks to 80% to 90% in 2020.
• Truly loses some market share amid growing competition.
• Truly's margin profile is 500 basis points below the group (implying 8%) and doesn't improve in 2020.
• Truly still contributes $1.55 per share in EPS, which translates to a valuation improvement of $47 per share.

Aside from seltzer, Boston Beer's remaining portfolio is "quietly improving," aided by better exposure to IPAs after the acquisition of Dogfish Head; improved distribution; and continued growth from Twisted Tea.

Boston Beer Price Action

The stock was trading 6.7% higher at $399.06 at the time of publication Tuesday.

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Photo courtesy of Boston Beer.