Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick,...
Transcript of Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick,...
![Page 1: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/1.jpg)
1
Duke Investment Club
Boston Beer Co. (SAM)
Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas Kottamasu,
Sachin Mitra, Tim Evans
![Page 2: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/2.jpg)
Investment Thesis
Boston Beer Co.’s share price doesn’t reflect the following headwinds:
1. SAM’s nonexistent exposure to growth markets
2. Increased competition in the craft beer space
3. Questionable recent share price movements
Current Dividend: 0%
Recommendation: SELL
Current Share Price: $159.87 (as of close 4/2/2013)
2014 target: $131.00 (19.8% upside to short)
Zhou Fang 2
![Page 3: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/3.jpg)
Company Background
3 Austin Lu
• Largest craft brewer in the U.S.
• Approx. 1% of overall market
• Over 50 beers under the Samuel Adams /
Sam Adams brand names
• Twisted Tea “flavored malt beverages”
• Angry Orchard hard cider brands
• Above brands <1% of sales
• 97% of sales in North America
• Family company
• Cofounder and Chairman – Jim Koch
• Family owns ~30% of Class A shares and
100% of Class B Shares
• Controls 5/8 board seats
![Page 4: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/4.jpg)
Market Growth Trends
-8.0%
-3.0%
2.0%
7.0%
12.0%
-
100,000
200,000
300,000
400,000
500,000
600,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
+/-
% a
nn
. g
row
th
1,0
00 h
l
Global Beer Production & Growth
North America Asia USA China
Data: Brewers Almanac
-1
0
1
2
3
4
5
CA
GR
Forecasted 2012-2016 Volume CAGR by Region
Volume % Growth
Source: Canadean, SABMiller
Austin Lu 4
![Page 5: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/5.jpg)
Where is the growth?
5 Austin Lu
![Page 6: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/6.jpg)
Industry Breakdown
6 Vikas Kottamasu
![Page 7: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/7.jpg)
Major Brewers Encroach
7 Tim Evans
![Page 8: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/8.jpg)
Craft Beer Industry
• 2012: Craft 15%, Overall Beer Market 1%
• 2012: Number of breweries increased 18%
• 6.5% share of the beer market by volume
– SAM comprises ~22%
8
Key Points:
Zhou Fang
![Page 9: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/9.jpg)
Increasing Competition
9 Zhou Fang
Number of Breweries in U.S.: 420 (2006) +3600
![Page 10: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/10.jpg)
Competition: Wine and Spirits
10 Zhou Fang
![Page 11: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/11.jpg)
Beer Loses Market Share
11 Zhou Fang
![Page 12: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/12.jpg)
Fast Growing Competition
12 Tim Evans
Key Points:
• SAM is not among top 10
• 5 of 10 are pure craft
• Other 5 are BUD
![Page 13: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/13.jpg)
BEER Act
Key Points:
• Legislates definition of “small” brewer:
– Under 6 million barrels per year
– (Previously 2 million)
• Cuts excise tax from $7 a barrel to $3.50
• Cuts tax of $18 per barrel to $16 for
“small” brewers
• Strongly opposed by large breweries
13 Zhou Fang
![Page 14: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/14.jpg)
SAM-Specific News
14 Vikas Kottamasu
Key Points:
• Invention of “Sam Can”
• Giving it away…for free
• “Freshest Beer” Program
• 12/12/2012 Call:
• “Timing of certain SG&A expenses”
• Twisted Tea hits the market
• 2/19/2013 Q42012 Call
• Can announcement
![Page 15: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/15.jpg)
Implications - Industry
15 Tim Evans
How do overall beer market trends impact SAM?
• Zero exposure to fastest growing markets
• Competitors are far-better positioned to ride these trends
• Target market consumer preferences are shifting to wine and spirits
• Major breweries are aggressively entering the craft space
• Shock Top grew 116% in 2011
• SAM likely will lose market share in an already small segment
Craft
Everything else
There are thousands of breweries
competing for this slice!
![Page 16: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/16.jpg)
Implications – Craft
16 Tim Evans
How do craft beer market trends impact SAM?
• Massive increase in competition severely threatens sustainable growth rates
• Fierce loyalty to regional brands
• Low barriers to entry for craft breweries
• Costco vs. Sam’s Quik Shop Analogy
![Page 17: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/17.jpg)
Implications – News
17 Tim Evans
How do recent company-specific news items impact SAM?
• For Chairman Jim Koch, is Boston Beer Co. a hobby or a
business?
• Cans, hops…noble or competitive?
• Cans vs. Bottles – Who gets the shelf space?
• Cannibalization
• Koch’s Promise (2005 “Drinker’s Bill of Rights”)
• Sam Adams will never be put in cans
• “Freshest Beer”
• Threats to inventory / supply
![Page 18: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/18.jpg)
SWOT Analysis
Austin Lu
Strengths
• Largest craft brewer
• Led craft revolution
• Experienced high growth
Weaknesses
• Zero exposure to growth markets
• Limited economies of scale
• Difficulty balancing craft tradition with business expansion
Opportunities
• Part of growing market
• Non-beer brands
• International expansion
Threats
• Shifting consumer preferences
• Explosive emergence of new breweries
• Major players entering craft market
18
![Page 19: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/19.jpg)
Share Performance
• Dec 12, 2012: SAM raised
its FY12 EPS estimate due
to increased shipment
volumes and the timing of
certain SG&A expenses
• SAM Share Price:
– Current: $159.87
– 52wk Range: 97.47 - 164.52
• Short % of Float = 24.2%
Seamus FitzPatrick 19
![Page 20: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/20.jpg)
Share Performance
Seamus FitzPatrick
50% more valuable company since November, given these headwinds…?
20
![Page 21: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/21.jpg)
Growth and Margins
Seamus FitzPatrick
Key Points:
• Craft Beer market growth
accounts for SAM’s revenue
growth
• SAM has lower gross margins,
operating margins, and EBIT
margins than BUD
• Price Competition:
• ABInbev:
• Shock Top etc.
• MolsonCoors:
• Blue Moon
• Multitude of pure craft
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2011 2012 2013 2014 2015
EBITM
argin
EBITMargin
SAM
BUD
TAP
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2011 2012 2013 2014 2015
Growth(y
oy)
RevenueGrowth
SAM
BUD
TAP
21
![Page 22: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/22.jpg)
Price/Earnings
Seamus FitzPatrick 22
![Page 23: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/23.jpg)
Relative Valuation
23 Seamus FitzPatrick
![Page 24: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/24.jpg)
DCF Assumptions
Growth Assumptions
Revenue Growth (Annual) 14 (+.1)%
COGS Growth (Annual) 45 (+.2)%
Terminal Growth Rate 3%
Growth Period 10 years
WACC Assumptions
WACC 9.1%
Beta 0.84
Risk- Free Rate 1.85%
Market Risk Premium 8.6%
Vikas Kottamasu
WACC 9.1%
NPV of FCF $573.8
Terminal Growth Rate 3.0%
Terminal Value $2,869.4
NPV of Terminal Value $1,201.0
Enterprise (Equity) Value $1,774.9
Shares Outstanding 13.400
Equity Value / Share $132.45 (20% downside)
Perpetuity Growth Model Sensitivity Analysis
WACC
8.10% 8.60% 9.10% 9.60% 10.10%
2.00% $142.63 $129.93 $119.08 $109.70 $101.53
Terminal 2.50% $151.83 $137.42 $125.26 $114.85 $105.86
growth 3.00% $162.85 $146.26 $132.45 $120.78 $110.80
rate 3.50% $176.26 $156.82 $140.92 $127.68 $116.49
4.00% $192.94 $169.69 $151.06 $135.82 $123.12
24
![Page 25: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/25.jpg)
Intrinsic Valuation
Zhou Fang 25
Assumptions
Bull Expected Bear
Growth Rate: 15(+.2)% 14(+.1)% 13.00%
WACC: 9.10% 9.10% 9.10%
Terminal Rate: 3.00% 3.00% 3.00%
Base Case Target: $132.45
![Page 26: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/26.jpg)
Risks to Thesis
26 Austin Lu
Main Risks:
Craft beer industry continues it’s incredible growth
• Long-Short: BUD
Consolidation in Industry – Acquisition Target?
• Unlikely family wants to sell out
![Page 27: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/27.jpg)
Conclusion
Boston Beer Co.’s share price doesn’t reflect the following headwinds:
1. SAM’s nonexistent exposure to growth markets
2. Increased competition in the craft beer space
3. Questionable recent share price movements
Current Dividend: 0%
Recommendation: SELL
Current Share Price: $159.87 (as of close 4/2/2013)
2014 target: $131.00 (19.8% upside to short)
Vikas Kottamasu 27
![Page 28: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/28.jpg)
Questions?
28
![Page 29: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/29.jpg)
Appendix - Comps
Boston Beer Company,
Inc., The (SAM)
Share
Price
Share
Price
52
Week
High
Market
Cap
Revenue Growth
Rate (%) Gross Margin EBIT Margin Debt/E
quity
Ratio
EV/EBITDA Price / Earnings PEG
Beta
Company
Ticker (US$) (US$)
(US$m
m) TTM 2013E 2014E TTM 2013E 2014E TTM 2013E 2014E TTM FY1
TTM FY1 FY2 2014E
AB Inbev BUD 98.44 96.9%
160,04
0 1.8% 5.7% 6.3% 58.6 59.2 60.2 33.8 33.2 35.0 107.78 40.7 11.7 21.9 20.9 18.4 2.5 0.84
Molson Coors
Brewing
Company TAP 51.36 97.0% 9,257 11.4% 13.7% 3.0% 39.9 36.8 37.0 25.7 23.6 24.4 58.59 12.7 9.7 20.9 12.7 11.9 2.8 0.78
Craft Brew
Alliance, Inc. BREW 7.46 83.6% 139 12.2% 9.8% - 29.9 - - 5.0 10.0 - 12.31 7.7 8.2 56.7 27.3 25.0 - 0.87
SABMiller PLC SAB 12.4% 29.2% 6.3% 47.7 56.0 56.2 30.9 22.8 24.0 73.58 38 10.9 20.0 22.2 19.7 2.0 1.01
Heineken HEIA 7.4% 11.6% 4.5% 43.3 40.9 42.7 21.6 15.6 16.3 114.27 28.5 10.4 11.6 18.4 16.4 1.8 0.67
Mean 52.42 92.5% 56,479 9.0% 14.0% 5.0% 43.9 48.2 49.0 23.4 21.0 24.9 73.31 25.5 10.2 26.2 20.3 18.3 2.3 0.83
Median 51.36 96.9% 9,257 11.4% 11.6% 5.4% 43.3 48.5 49.5 25.7 22.8 24.2 73.58 28.5 10.4 20.9 20.9 18.4 2.3 0.84
High 98.44 97.0%
160,04
0 12.4% 29.2% 6.3% 58.6 59.2 60.2 33.8 33.2 35.0 114.27 40.7 11.7 56.7 27.3 25.0 2.8 1.01
Low 7.46 83.6% 139 1.8% 5.7% 3.0% 29.9 36.8 37.0 5.0 10.0 16.3 12.31 7.7 8.2 11.6 12.7 11.9 1.8 0.67
Boston Beer
Company, Inc.,
The SAM 156.00 94.8% 2,014 13.1% 13.6% 10.5% 54.3 53.9 54.4 16.5 16.2 16.6 0.26 - 15 35.7 31.4 27.5 2.6 0.82
29
![Page 30: Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas · PDF fileAustin Lu, Seamus FitzPatrick, Zhou Fang, ... Perpetuity Growth Model ... Boston Beer Company, Inc., The (SAM) Share](https://reader031.fdocuments.in/reader031/viewer/2022030422/5aa987447f8b9a77188cfc7d/html5/thumbnails/30.jpg)
Appendix - DCF
30