Boston Beer Inc.

Case Analysis
Group (Section B)
MDI Gurgaon
Arnab Pramanik 13P129
Ashima Tayal 13P130
Rahul Agarwal 13P158
Rattan Preet Singh 13P161

Agenda

Boston Beer: Overview

Recent IPOs

Ratio Analysis

Valuation: P/E

Valuation: DCF

Boston Beer Overview

Largest craft brewer, grew by CAGR of 56% 1990-94
Used contract breweries, exploited excess production capacity
Intensive marketing & sales - 40 for each $

Beer industry stagnant, but craft breweries growing rapidly

Low capex, higher margins

Recent IPOs
Redhook
2 plants, plans to invest in a 3rd
Alliance with Budweiser to use its distribution network
Sales CAGR 41% 1990-94

Petes
Contract brewer
Alliance with Strohs
Planned own brewery
Sales CAGR 111% 1990-94

Ratio Analysis

Vertical Analysis

1,990

1,991

1,992

1,993

1,994

9/30/94 9/30/95 Average

Gross Sales
Less excise taxes
Net Sales

100%

100%

100%

100%

100%

100%

100%

Cost of good sold

-43%

-44%

-46%

-46%

-46%

-47%

-48%

Gross profit

57%

56%

54%

54%

54%

53%

52%

Adv., promotional, selling

expenses

-47%

-41%

-44%

-42%

-40%

-39%

-40%

-42%

General & administrative

expenses

-10%

-8%

-7%

-5%

-6%

-5%

-5%

-6%

Total operating expenses

-57%

-49%

-51%

-48%

-46%

-45%

-45%

-48%

Operating income

0%

7%

4%

6%

8%

9%

7%

Other income (expense) net

1%

0%

0%

0%

0%

0%

1%

Net income (1)

2%

7%

3%

6%

8%

9%

8%

Pro forma taxes (2)

-1%

-3%

-1%

-3%

-3%

-4%

-3%

Pro forma net income (3)

1%

4%

2%

4%

5%

5%

4%

-46%

1%

Valuation: P/E
Trading comps
Petes has very high growth rate
Redhook has low growth rate compared to Boston Beer
Therefore, PEG ratio is a better estimate as it adjusts for growth
Average of PEG of Petes and Redhook considered
P/B ratios for Petes and Redhook are very different, hence difficult to determine which is reasonable

Assumption
Traded companies are correctly priced in market
If Petes & Redhook are overpriced, Boston Beer valuation will also be overpriced
Affect of leverage not accounted for

Transaction comps
Petes has less investment in capex similar asset structure
High investment in marketing and branding

Valuation: DCF
1,994

Tax rate=average(income tax expenses/inc. before tax)

1995

1996

1997

963.9 1301.265 1756.708

1998

1999

2283.72

2854.65 3282.848

2000

2001

Barrels Sold

714

3446.99

Net Sales/Barell

161

161

161

161

161

161

161

161

% growth in barrel sales

50%

35%

35%

35%

30%

25%

15%

5%

Rf=30 yr. govt. treasury note rate

Unlevered beta=0.93 from S&P

Net Sales

Market risk premium=7%

1,14,833 155024.6 209283.1 282532.2 367291.9 459114.9 527982.1 554381.2

COGS

-52,851 -71174.5 -96085.6

Gross Profit

COGS=47% of sales ( average of last 3 years)

61,982

Adv., promotional, selling expenses

General & administrative expenses

Operating expenses=48% of sales

EBIT

5,154

Equipment spend=2.7% of sales

Capital structure after IPO assumed to remain constant
Share Price=$7.62

1,990

1,991

1,992

1,993

-254526

1,52,817 1,98,662

2,48,327 2,85,576 2,99,855

-119050

-193456

-154765

16,722

21,739

27,173

-222475

-233598

-31852 -33444.6
31,249

32,812

-7023.3 -9130.28 -11412.9 -13124.8

-13781

7,184

9,699

12,608

15,761

18,125

19,031

1,465

1,978

2,571

3,214

3,696

3,881

-4,500

-13,000

-723

-1,492

-2,014

-2,330

-2,524

-1,893

-726

Change in WC

-6,913

-3,818

-5,154

-5,964

-6,461

-4,846

-1,858

FCFF

-6,813

-9,660

4,509

6,885

9,989

15,081

20,328

89%

79%

70%

63%

56%

49%

Discount Factor
PV

-8590.51 3565.428 4841.882 6246.618 8386.871 10052.82

PV CF 1995 end

24503.10477

Terminal Value

123691.4505

Firm value

148194.5553
-1950

Equity Value

146244.5553

share value

7.62405147

9/30/94

510

9/30/95

121

174

294

Net sales per barrel

156

169

164

162

161

158

158

65

69

87

110

138

124

174

291

427

554

701

832

650

626

44%

69%

62%

50%

% Growth in barrel sales

714

12,387

-242406

CAPEX

Barrels sold

Net sales per employee

475

1,994

-210788

Incremental Capex

Long Term Debt

Employess

5,322

D&A

Working Capital=7% of sales

Statistical Data

9,175

-3732.12 -3853.66 -5202.44

NOPAT

Terminal growth rate=4%

1,13,198

-168630

-6,793 -9352.29 -12625.6 -17044.5 -22157.9 -27697.4

8,886

Taxes 42%

83,850

-46,303 -65322.3 -88185.1

-129716

688

35%

123691.5

Thank You