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Boston Beer shares down 24% but still a 'hold'

The maker of Samuel Adams and other craft brews faces higher barley costs and competitive pressures, but has growth potential.

October 09, 2011|By Andrew Leckey

Question: Something bad has happened to my Boston Beer Co. shares, and I want to know if problems will continue.

Answer: The maker of Samuel Adams beer must contend with the higher cost of barley, a key ingredient in its brews, as well as competitive pressures.

Although it is the leading producer in the highly fragmented U.S. craft brew industry, it accounts for less than 1% of the total U.S. beer market. Growth potential therefore is a major consideration for its stock.

But with most of its production and sales in the eastern U.S., its capital expenditures for significant expansion in the U.S. and abroad would be high. The dominant forces in the beer business remain MillerCoors and Anheuser-Busch InBev, which are introducing their own craft beers and acquiring other trendy brewers.

Shares of Boston Beer Co., which produces beer, flavored malt beverages and hard ciders, are down 24% this year.

Profits rose 72% in the second quarter mostly because of a positive settlement with a former glass-bottle supplier. A decline in Sam Adams Light sales was partially offset by increases in its Twisted Tea, Boston Lager, Brewmaster's Collection and Seasonals products. Marketing, advertising and freight costs rose in the quarter.

Boston Beer reduced its full-year expectations and said it is "exploring opportunities for price increases" because of the higher cost of the barley crop.

Consensus analyst opinion on Boston Beer stock is "hold," according to Thomson Reuters, consisting of one "strong buy," one "buy," five "holds" and one "underperform."

Boston Beer was launched in the mid-1980s and taken public in 1995 by founder Jim Koch, who is featured in its commercials. Koch last year rolled out the Freshest Beer Program, which reduces the lag between brewing and delivery to customers. The company's website notes that over the years he has resisted several offers for the company from large brewers.

ClearBridge fund for conservative investors

Question: I would like your opinion of Legg Mason ClearBridge Appreciation Fund.

Answer: It is a classic core holding for a conservative investor's personal portfolio that offers diversified holdings and sustainable dividends. It can be expected to underperform during market rallies and outperform during downturns.

The $3.7-billion Legg Mason ClearBridge Appreciation "A" recently is down 2% over the previous 12 months to rank in the top 30% of large growth and value funds. It returned 3% over the previous 10 years.

"This fund is for someone who doesn't like risk or volatility," said Shannon Zimmerman of Morningstar Inc. "It should be someone who doesn't mind not getting every percentage point of an up market in exchange for not losing every percentage point in a down market."

The co-managers are Scott Glasser, who has been with the fund for a decade, and Michael Kagan, who joined it in 2009. Both manage other Legg Mason funds. The team keeps the portfolio diversified across sectors, favors strong company management and looks for firms whose earnings growth potential isn't reflected in stock price.

According to filings, Glasser has more than $1 million of his own money in the fund, thereby keeping interests of shareholders aligned with his own. Kagan has less than $50,000 in this fund but has more than $500,000 invested in other Legg Mason funds.

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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