UBS Questions Boston Beer's Dogfish Head Purchase, Increasing Exposure To Difficult Craft Beer Category

The craft beer market is getting crowded with new brews showing up and taking share away from established craft brewers. So, the recent decision by Boston Beer Company Inc SAM to get even deeper into an increasingly competitive industry by buying another craft brewery is curious, says UBS Securities.

The Analyst

UBS analyst Sean King raised the price target on Boston Beer from $244 to $250 and kept his Sell rating on the stock.

The Thesis

The company, which makes Sam Adams, has acknowledged the challenge for its kind of company – one of the pioneers in the craft beer industry that grew to be a dominant brand.

The company has blamed stagnation on regional fragmentation, with more and more local brews driving declines in leading national brands, like Sam Adams. Boston Beer is the second-largest craft brewer in the U.S., behind privately held D.G. Yuengling & Son.

Recently, Boston Beer said it's acquiring Delaware-based craft brewer Dogfish Head for $300 million.

Dogfish Head is the nation’s 13^th largest craft brewer. And while Boston Beer's beer sales are declining, Dogfish Head sales have been growing at a double-digit rate.

Still, King wrote in a Wednesday note: “We question the rationale of increasing exposure to Craft. With the Dogfish Head transaction, SAM’s exposure to the craft beer category will go up from about 20 percent of sales to about 30 percent and reduce the total company's underlying growth profile.”

Boston Beer has branched out beyond craft beer, with brands that include Twisted Tea hard iced tea, Angry Orchard ciders and Truly acoholic sparkling waters.

King does think there will be incremental profit contribution from Dogfish Head, enough to at least offset any effect of share issuance on earnings.