4 Red Flags Boston Beer Investors Might Have Missed

Harry Domash  |

On July 22, shares of Boston Beer Company (SAM) soared 15% to $190.16 per share after the maker of leading craft beer brand Samuel Adams reported June quarter results.

Boston reported earnings of $2.06 per share, 12 cents above analysts’ forecasts. Further, revenues (sales) for the quarter totaled $261 million, $5 million over analyst expectations. Boston’s share price surge wasn’t unusual. The market typically rewards stocks that beat analyst forecasts.

However, that excitement was short-lived. By last Wednesday, September 28, Boston’s share price had dropped 21%. Why?

Enthusiastic investors didn’t dig into the numbers and overlooked four “red flags” warning of problems ahead. Two could have been easily plucked from Boston Beer’s earnings press release, but the other two required consulting detailed financial statements. In the weeks following the announcement, analysts caught on and their downgrades triggered the ensuing share price drop. Here are the four red flags.

Red Flag #1 Revenues

Boston Beer, a pioneer of the surging craft beer industry, is understandably priced as a growth stock, and growth starts with sales. Since beer sales are seasonal, it’s best to compare June quarter sales to the year-ago number. By that measure, although beating forecasts, revenues (sales) were actually down 3%, so Boston Beer isn’t growing.

Red Flag #2 Gross Margins

Gross margin measures the profit a company makes on a product considering only production costs. A 25% margin means that the company made 25 cents for every dollar of sales before deducting the other costs. Gross margins tell you a lot about a company’s position in its market. Rising margins say a firm’s competitive position is improving and vice-versa.

You’ll need a calculator, but gross margin is simply gross profit divided by sales. The June quarter press release listed both. Anyone who did that calculation would have found that the June quarter GM was 48.6% vs. year-ago 52.9%, a red flag warning that Boston Beer’s competitive position was deteriorating.

Red Flag #3 Inventories

A firm’s balance sheet contains important clues about its fundamental outlook. Boston Beer did not report sufficient detail in its press release, but MarketWatch and many other financial sites have the needed information. Using MarketWatch, after entering the Boston’s ticker (SAM), select Financials, and then Quarterly Financials and Cash Flow Statement. As with sales and margins, always compare the most recent and year-ago quarters to avoid seasonality effects.

Inventories (stock on hand) should more or less track sales. Since Boston’s June quarter sales dropped 7%, you’d expect a similar drop in inventory levels. Instead, inventories rose 7%.

Red Flag #4 Receivables

Accounts receivables are the amounts that Boston Beer’s customers owe for products received. Receivables rising faster than sales tells you that customers are taking longer to pay their bills. There could be many reasons, but none are good news. Thus, it’s a red flag when receivables grow faster than sales, or in this case, rise when sales drop. Again, comparing the June 2016 and June 2015 quarters, receivables also rose 7%, another red flag.

In the stock market, nothing works all the time. Sometimes you’ll detect red flags, but nothing bad happens. Other times, stocks crash without any evident red flags. So consider these red flag checks as another tool for your stock analysis toolbox, not the final answer.

For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective.

(Photo by Michal Hrabovec)

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

Companies

Symbol Name Price Change % Volume
SAM Boston Beer Company Inc. (The) 366.38 3.46 0.95 93,877 Trade

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
GOOG

     
XOM

     
BRK.A

     
FB

     
JNJ

     
WFC

     
T

     
NFLX

     
TSLA

     
V

     
UNH

     
PG

     

Blockchain in Fintech - Discussion at the EU Parliament

From the recent Blockchain For Europe Summit in Brussels: Panel on Financial Market Infrastructure