1
Duke Investment Club
Boston Beer Co. (SAM)
Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas Kottamasu,
Sachin Mitra, Tim Evans
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
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
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
Where is the growth?
5 Austin Lu
Industry Breakdown
6 Vikas Kottamasu
Major Brewers Encroach
7 Tim Evans
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
Increasing Competition
9 Zhou Fang
Number of Breweries in U.S.: 420 (2006) +3600
Competition: Wine and Spirits
10 Zhou Fang
Beer Loses Market Share
11 Zhou Fang
Fast Growing Competition
12 Tim Evans
Key Points:
• SAM is not among top 10
• 5 of 10 are pure craft
• Other 5 are BUD
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
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
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!
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
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
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
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
Share Performance
Seamus FitzPatrick
50% more valuable company since November, given these headwinds…?
20
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
Price/Earnings
Seamus FitzPatrick 22
Relative Valuation
23 Seamus FitzPatrick
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
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
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
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: $131.00 (19.8% upside to short)
Vikas Kottamasu 27
Questions?
28
Appendix - Comps
Boston Beer Company,
Inc., The (SAM)
Share
Price
Share
Price
52
Week
High
Market
Cap
Revenue Growth
Rate (%) Gross Margin EBIT Margin Debt/E
quity
Ratio
EV/EBITDA Price / Earnings PEG
Beta
Company
Ticker (US$) (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
Appendix - DCF
30
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