For Immediate Release
Chicago, IL – February 20, 2020 – Zacks Equity Research Shares of Boston Beer Company SAM as the Bull of the Day, Spirit AeroSystems SPR asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Apple AAPL, Starbucks SBUX and Carnival CCL.
Here is a synopsis of all five stocks:
Bull of the Day:
The beverage industry is a tough place to operate. For every successful brand, there are dozens of failed attempts to produce the new hot item that never quite caught on. In fact, even brands that have become big sellers are never quite safe from seismic shifts in consumer tastes and perceptions.
Those issues are even more significant in the market for alcoholic beverages, but there’s a reduced market size (about ¼ of the population isn’t old enough to legally purchase your products) and a confounding patchwork of regulations regarding packaging, labeling and distribution.
Given the obvious challenges, you might surmise that you’d have to have a screw loose to found a beverage company, and for the most part you’d be correct. Except not in the case of Jim Koch and The Boston Beer Company.
In 1984 - having already earned a BA, a law degree and an MBA from Harvard – Koch started one of the first “microbreweries” in the US, naming his flagship product Samuel Adams Boston Lager after the founding father who operated a brewery in Boston in the 18th century. The beer gained swift popularity among drinkers who had become bored of more standard offerings from the likes of Anheuser Busch, Miller and Coors.
Originally planning to sell about 5,000 barrels of beer annually, by 1995, Koch and Boston Beer were selling millions of barrels and went public at $15/share – appropriately enough (given that their namesake was one of the architects of American democracy) through a subscription offering that gave prospective small investors an equal opportunity to buy shares as big clients of underwriting firms.
Those shares were a great buy, having appreciated better than 2,700% since then.
Countless other small brewers have been bought by international beverage giants over the past decade, but Boston Beer has remained independent – and kept a fiercely dedidacted group of customers in an industry where such loyalty isn’t necessarily common. They’ve also aggressively gotten ahead of other trends that have fueled sharply rising revenues even as overall beer sales in the US have leveled off.
The biggest of those trends lately has been the enormous popularity of spiked seltzer drinks. Flavored bubbly drinks with beer-like levels of alcohol are widely perceived and a healthier alternative because of their lower amounts of calories and carbohydrates.
Boston Beer’s offering in the category is Truly Seltzer and an explosion in sales is fueling revenue growth at Boston Beer despite the fact that sales of Sam Adams and other similar beer products have shown slight declines.
They’re not just making up for lost beer sales however, they’re also attracting customers who might otherwise be buying wine. Wine sales in the US are roughly $70 billion annually, but younger millennial buyers increasingly prefer seltzer drinks to conventional wine products.
Interestingly, while the number of alcoholic beverages consumed by the average American adult fell slightly (by about 7 drinks/year) between 2017 and 2018, overall sales increased by $12 billion – or 5.1%. This would seem to suggest that consumers are buying more expensive premium products instead of the generic products that are often offered at bargain prices. This plays directly to the strengths of Boston Beer - which customers view as a higher quality alternative to mass produced names.
On Wednesday, Boston Beer reported a big increase in sales. Gross revenues for the quarter of $3.1 million easily surpassed the Zacks Consensus Estimate of $277M. Net earnings were worse than expected, with the company earning $1.12/share – considerably lower than the expected $1.42.
Management explained that despite increased sales, the cost of advertising and promotions as well as lower gross margins cut into the bottom line. In after-hours trading, shares declined nearly 10% from Wednesday’s closing price of $429. For investors, that represents a chance to get in at a significant discount.
If you're tempted to "buy the dips" when quality companies decline, this could be a rare opportunity.
It’s a tough industry and shares of Boston Beer are still not exactly cheap on a valuation basis, trading at 33X forward earnings. You can’t argue with success however, and with a product mix that’s producing steadily growing revenues, Boston Beer is definitely on top of the beverage market, despite the earnings miss.
Bear of the Day:
The problems facing aircraft manufacturer Boeinghave been well-documented. The company’s best-selling and most profitable plane – the 737 MAX – has been grounded for nearly a year and even the most optimistic forecasts don’t call for a return to the skies before mid-summer 2020.
Boeing shares have declined more than 20% since hitting an all-time high of $446/share in March of 2019. The price damage likely would have been worse if the company didn’t have a multi-year backlog of orders to fill once 737 MAX deliveries start once again.
Investors have largely adopted the view that lost revenues will be recouped once the crisis is resolved.
As the grounding of the MAX drags on however, it’s not just Boeing that’s suffering from a loss of revenue. Suppliers are now forced to significantly change their plans in response to the uncertain schedule for the recertification of the airplane.
Spirit AeroSystems manufactures the fuselage for the MAX and other Boeing planes and derives up to 85% of its annual revenues from sales to Boeing and more than 50% specifically from 737 components.
Note: Spirit AeroSystems should not be confused with Spirit Airlines, a discount carrier that currently carries a Zacks Rank #1 (Strong Buy).
Spirit AeroSystems announced in December that deliveries to Boeing would cease indefinitely on January 1st, 2020. The official release explained that, “this suspension will have an adverse impact on Spirit’s business financial condition, results of operations and cash flows.” The company went on to say that more information would be included in the Q4 earnings release. That release is due this Friday, February 21st.
Management also declared they are, “evaluating all potential actions to align the cost base with the lower production levels expected in 2020." On February 7th, Spirit declared a quarterly dividend of just $0.01/share, a 91% decrease from the $0.12/share they had been paying previously. They explained that they were making the move out of an abundance of caution and in the belief that it is prudent to preserve liquidity as the situation plays out.
They also noted that there is currently a backlog of approximately 4,400 MAX aircraft.
Spirit recently acquired significant assets from smaller manufacturer Bombardier Aerostructures, and those operations are likely to cushion the revenue shortfall, but by only a small amount.
The effect on earnings estimates has been dramatic. Over the past 60 days, the Zacks Consensus Earnings Estimate for full year 2020 has been reduced from $7.21/share to just $2.23/share.
It won't surprise you that SPR is currently a Zacks Rank #5 (Strong Sell).
There is definitely a possibility that the MAX will be back in the skies this Summer and Boeing and Spirit will ramp sales back up all the way to capacity to fill the order backlog. That’s still months away and far from certain. In the meantime, there’s likely to be some turbulence.
Spirit management is doing the best they can in a bad situation, but investors would be wise to avoid Spirit AeroSystems, especially heading into the Q4 report this Friday.
How the Coronavirus May Be Impacting Your Portfolio
The coronavirus is having a rippling impact on businesses across the globe as the world’s most populated country and second-largest economy shuts down cities to contain this new contagion. This is impacting supply chains across industries and cutting demand in a massive consumer market.
Appleannounced that it was revising its March quarter revenue guidance, saying that it will be unable to meet current expectations. This is following the company’s best quarterly sales to date.
Apple is being hit on both the supply and demand side. iPhone manufacturing plants were initially shut down outside of the Hubei Provence (the ostensible origin of the coronavirus) and have been slow to ramp production back to normal levels, which is impacting the global iPhone supply. Apple was also forced to shut down all its China-based Apple Stores, which will undoubtedly weigh heavily on the firm’s demand. These concerns are only near term and shouldn’t have any systemic effects that need to worry investors.
Apple is far from the only American company that is being affected by this devastating virus. Starbucks has shut down a large number of locations in the cities that have been most affected. These shutdowns will undoubtedly have a negative bearing on this upcoming quarterly report. Long-term impacts are still yet to be seen, but I predict that normal operations will resume once the virus is under control.
Supply chains of chip-making companies who have manufacturing in China, are slowing production across the country. China is also the world’s largest chip buyer, so this virus will likely temporarily reduce demand. The virus is likely just pushing demand out, not getting rid of it. I don’t expect that chipmaker shares will have any downside from the coronavirus. Chip stocks have been driving higher since the coronavirus outbreak with investors evidently not concerned.
Is the coronavirus going to have a lasting impact on the world economy, or is this just a near term hurdle? Short-term hurdles with little effect on long term objectives will likely not have a substantial push on a firm’s share price.
As an investor, we need to contemplate whether the coronavirus will have long term implications on our investments, even after the virus has run its course. One space that I believe this virus may have lasting effects on is luxury cruise lines.
The Diamond Princess, owned by Carnival, a cruise that never should have departed the mainland, left Yokohama, Japan, on January 20th with 1,045 crewmembers, 2,665 healthy passengers, and one infected passenger. Two weeks later, 10 passengers tested positive for the virus, and the whole ship was put under quarantine. All passengers were confined to their small cabins. This quarantine has been lasting for over 2 weeks in what sounds to me like the worst type of cabin fever imaginable. Today there are 624 confirmed cases on the ship, and the figure continues to climb as rescue efforts are undertaken.
Just the thought of being stuck in a small cruise cabin for weeks at a time, not knowing when you’ll be able to leave or whether you or your family is infected with a deadly disease, is enough to keep me away from cruises for some time. The unsettling story about the Diamond Princess will undoubtedly make waves for cruise lines, and they could be facing lasting demand shortages.
The coronavirus is crippling China’s economy and having impacts on global US corporations as well. The silver lining here is that the negative effect is likely only temporary, and with China’s economy on its knees, it may give the US some leverage in trade negotiations.
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Apple Inc. (AAPL) : Free Stock Analysis Report
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Spirit Aerosystems Holdings, Inc. (SPR) : Free Stock Analysis Report
The Boston Beer Company, Inc. (SAM) : Free Stock Analysis Report
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