Will Higher Costs Mar Boston Beer's (SAM) Earnings in Q3?

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The Boston Beer Company, Inc.SAM is slated to report third-quarter 2018 results on Oct 25. The company has been witnessing positive trends due to its focus on reviving Samuel Adams and Angry Orchard brands. However, Boston Beer delivered a negative earnings surprise of 28.5% in the last reported quarter due to higher costs and soft gross margin.

A glimpse of the company's earnings performance in the trailing four quarters shows that it has outpaced estimates by an average positive surprise of 14.2%. Additionally, the company's surprise history revealed that it delivered an earnings beat in five out of the last seven quarters and topped sales estimates in three out of the last five quarters.

The Boston Beer Company, Inc. Price and EPS Surprise

The Boston Beer Company, Inc. Price and EPS Surprise | The Boston Beer Company, Inc. Quote

Although the Zacks Consensus Estimate of $3.17 per share for third-quarter 2018 remained unchanged in the last 30 days, the same reflects year-over-year growth of 14%.

Let's find out what's in store for Boston Beer in the upcoming third-quarter earnings release.

Things You Should Know

Boston Beer is benefiting from its three-point growth plan that focuses on cost-saving initiatives, long-term innovation, and the revival of Samuel Adams and Angry Orchard brands. The company's focus on pricing, product innovation, growth of non-beer categories, and brand development are likely to boost operational performance and market position.

Further, robust shipments and depletions trend - owing to strength in Twisted Tea, Truly Spiked & Sparkling, and Angry Orchard brands - aided sales growth in second-quarter 2018. The company's non-beer portfolio is poised to deliver significant depletions growth in the future. This is likely to be driven by expansion of distribution and customer base for the Twisted Tea brand, early success of the Angry Orchard Rosé cider launch, and the Truly Spiked & Sparkling brand's leadership position in the emerging hard sparkling water category.

Based on favorable trends witnessed in the first half, the company raised depletions forecast for 2018. It projects depletion growth of 7-12% compared with flat-to-up 6% stated earlier.

However, higher advertising, promotional and selling expenses, as well as gross margin contraction, hurt the company's bottom line in the second quarter. For 2018, it expects investment in advertising, promotional and selling expenses (excluding any increase in freight costs) to increase $15-$25 million.

Moreover, general and administrative expenses are likely to grow $10-$20 million, attributable to organizational investments and stock-compensation expenses. This should continue to hurt bottom line growth.

Despite cost-saving initiatives, Boston Beer's gross margin declined, owing to higher processing costs stemming from increased production at third-party breweries as well as escalated packaging costs. Due to higher costs from increased production volumes at third-party breweries, and higher ingredient and packaging material costs, the company lowered its gross margin forecast for 2018. Gross margin is now estimated to be 51-53% compared with the previous guidance of 52-54%.

Additionally, volume growth for Boston Beer's Samuel Adams brand has been key headwind, which is denting its overall volumes, depletions growth as well as the top line. The brand is struggling due to the industry-wide softening of the craft beer growth rates and increased choices for drinkers, owing to the entry of smaller craft brewers. Despite the early success of recent launches of Sam'76 and Samuel Adams New England IPA, volume for the Samuel Adams brand continued to decline in second-quarter 2018, which partly hurt depletions.

The company remains committed to reviving the Samuel Adams brand in the months ahead through continued innovation, promotion and brand communication initiatives, specifically for Samuel Adams Boston Lager and Seasonals. However, we believe that there is a lot of work to be done before seeing a turnaround in trends for this troubled brand.

These factors collectively contributed to the company's soft performance in recent months. Boston Beer's shares decreased 14.3% in the last three months, wider than the industry 's decline of 10%. Further, the stock has declined 5.6% in the past month, reflecting a negative sentiment on the stock ahead of earnings.

Zacks Model

Our proven model does not clearly show that Boston Beer is likely to beat earnings estimates because it does not have the right combination of two key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Boston Beer has a Zacks Rank #3. This combined with an Earnings ESP of -9.64%, makes surprise prediction difficult.

Stocks Likely to Deliver Earnings Beat

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Archer Daniels Midland Company ADM has an Earnings ESP of +3.85% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Bunge Limited BG has an Earnings ESP of +5.28% and a Zacks Rank of 2.

Tractor Supply Company TSCO has an Earnings ESP of +0.78% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: SAM , TSCO , BG , ADM

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