Boston Beer Company Equity Valuation

By: Abiyya Munir

Table of Contents
Background & Industry Development .....3
Company Analysis .....4
Historical Income & Cash Flow ...... 4
Free Cash Flow Forecasts ....5
Company Capital Structure .7
Equity Valuation using DCF ......10
Equity Valuation using EBITDA ...10
Closing .
.12

About Boston Beer Inc. and Its Industry

The Boston Beer Company, Inc is a company that makes and sells alcoholic beverages since its
founding in 1984 by Jim Koch. The company boasts more than 350 distributors who sell
beverages to retailers, such as pubs, restaurants, grocery stores, and stadiums to name a few, and
is a growing company of approximately 1,120 employees. Boston Beer Co. makes use of
privately owned breweries and sells primarily in the US, but also sells abroad in the Caribbean,
Canada, Europe and the Pacific Rim too. The company produces approximately 80 beers
products of which 60 are Samuel Adams and 20 are under other brands; 11 malt beverages under
the Twisted Tea brand; and 10 hard cider beverages under the Angry Orchard brand.
The company utilizes corporate social responsibility (CSR) to build the value of their brand
through several initiatives and sell a premium beer product in competition with local and
international breweries that have large market shares. Thus they work to build sales by creating a
high level of product differentiation and by globalizing their premium product.
As a whole, the company has slowly increased its total revenues over with a fluctuating, positive
growth rate, making it no. 62 on the Forbes List of Innovative Growth Companies. This could be
due to a stagnant beer industry, where Boston Beer Company holds around 0.9% of the market
and has further opportunity for growth. The company targets its product to affluent consumers,
usually males in their 30s. The company avoids debt through a five-year average sales growth of
16.7% and invests heavily in assets and PP&E. The beer company has a strong ROI of over 25%
and earns excess returns for their cost or raising capital, increasing its value in future years.
In spite of all of their strong growth, the company faces high competition from cheap beers,
alcohol substitutes and rivalries with microbreweries, leading to trade-downs and lower margins.
As a whole, the entire industry faces slower and slower growth and few alternative markets, and
there are strong barriers of entry. But by continuing distribution in the entire US and in more than
20 other countries globally, Boston Beer Company can continue their market penetration through
their distribution presence with a high volume of sales and a high quality product. In the last
decade, the company evolved by moving almost the entirety of their third-party (contracted)
breweries to independently owned breweries. At first, the company profited by using excess
capacity of contracted breweries for cost efficiency. However, with their high growth rate,
Boston Beer Company can now take advantage of cost efficiencies and save on operations for
better quality control by operating in their independently owned breweries.

Analysis of Historical Income and Cash Flow

The projected FCF committed to this analysis of the Beer Boston Company were created based
on a 20% revenue growth rate and a 4% cash flow growth rate and an operation margin of 15%.

These values were determined by examining previous trends showcased in the companys past
financial documents and were consistently applied to a 5 year period to show the companys
future potential and worth to us as prospective buyers.

From 2008 to 2012, the Boston Beer company displayed mostly a promising trend in its net
income as it gained quite a bit of traction from 2008 (NI of $8.088m) to 2009 (NI $31.118m)
which then stabilized but still grew for a few years up until 2012 where it briefly relapsed by
around 10%. In 2013 however, the company made further gains in its NI by growing to
$70.392m and in 2014 made an even more impressive jump to a NI of $92.743m.
On the basis of sales made, the Boston Beer Company never skipped a beat and demonstrated its
strength as a dominant American beer brand. The average growth rate of revenue was generally
around 10-20+% and it was ultimately decided a 20% growth rate would be suitable to utilize in
our projected cash flows.

Looking at the companys cash flow statements in recent past years, we can see the companys
current assets far exceed its current liabilities on a regular basis, making it highly liquid. The
company is able to generate a lot of working capital which is directed towards purchasing plant,
property and equipment to support its rapidly growing operations. Cash flow was tied up in the
companys financing activities up until 2014 when these activities started providing returns.
The ample room provided by the sufficient amount of working capital the Boston Beer Company
generates annually makes this company an attractive prospect due to it not critically needing a
cash flow budget to analyze liquidity issues.
The Boston Beer Companys total current assets in 2015 is $207.46 million and its total current
liabilities is $110.17 million, giving a current ratio of 1.88. In the previous year, the total CA was
$125.72 million and the CL amounted to $67.05 million, giving roughly the same ratio. The
current ratio indicates the Boston Beer Company is able to pay off its debts in a relatively short
period of time because of the large amount of assets it holds. The companys financial leverage
ratio of .10 shows it does not frequently use financing to fund operations and is thus not prone to
much risk.

The 13 million shares currently outstanding divided by the net income in 2015 which was $90.74
million gives an EPS of $6.98. In 2013, the EPS was $5.08 given a net income of $66.06 million
in 2013 with the same amount of shares outstanding. This trend of growth shows the company is
unlikely to face financial hardships in the near future.

Free Cash Flow Forecasts

Based on our excel spreadsheet, seen below, we used a clear and well defined equation to
determine historical and forecasted free cash flows:
NOPAT
+Depreciation
-CapX (capital expenditures)
- + NWC
=FCF
FCF is an important evaluation indicator for investors. It captures all the positive qualities in
internally produced cash from a company's operations and subjects it to a critical use of cash.
While earnings per share remains one of the most popular measure of a companys performance,
its not necessarily the best.
A company can produce high earnings per share one quarter and go dead broke the next, Enron is
a perfect example, but companies with constant growth levels of FCF are unlikely to essentially
go bust any time soon. With that being said, the results came in with an average of 4.4%
growth rate from 2015-2019 (5 years). It is hard to say that the company would continue growing
at such a rapid pace based off of historical data. For forecasted free cash flows we had $85.9
million for 2015, $103 million for 2016, $123.6 million for 2017, $148.4 million for 2018, and
$168.5 million for 2019.

FCF Forecast Table

The Boston Beer Companys Capital Structure

The Boston Beer Companys capital structures were consisted of debt and common stock. Debt
is $583 and Common stock, consisted of class A and B shares, which was $2822.10. We then
found the weights, which was 17.12% and 82.88% respectively. For debt cost of capital, we
found the interest coverage ratio and found the spread to be .40. When you add the spread to the
current 10 year treasury rate of 2.2218%, you get the synthetic yield-to-maturity 2.6218%. After
you account for tax, the cost of debt would be 1.63%.

Then, you would find the cost of equity by using CAPM. We found the beta of the company by
deleveraging the betas of the peers, averaging them, and then leveraged the beta, which was .
9951. We then found the MRP, which was 7.5%. After that, we plugged the numbers into the
CAPM equation to find the cost of equity, which came out to be 9.6852%.

The following equation was used to solve for WACC:WACC = (WD*RD)+(WS*RS)

Equity Valuation using DCF

The Terminal Value we found to be is $4,306.58, which we discounted for using a WACC of
8.31% and a free cash flow perpetual growth rate of 4.4%. The Terminal value by definition is an

asset at a specified, future valuation date, taking into account factors such as interest rates and
the current value of the asset, and assuming a stable growth rate. In addition to bond and asset
applications, terminal value can also refer to the value of an entire company at a specified future
valuation date. We then added the TV to the cash flow of 2019 to determine the present value of
2019, which turned out to be $2771.44. We then added all the PV of all the free cash flows and
we came up with the Equity Value of $3195.09.

Equity Valuation using EBITDA

To determine the equity valuation, EBITDA of comparable industry peers were chosen based off
of CapIQ. The peers are based on the beverage industry that compete in the same line of product
and have similar sales transactions.The final projected EBITDA of $393.20 from the cash flow is
combined as a product with the average Terminal Multiple of these companies, which is 20.2x.
That gives us the preliminary terminal value of $7942.98 and is subtracted by the illiquidity
discount of 25% of $1985.74 to get a total terminal value of $5957.00. After this process, the
total PV of TV, is equal to $5328.94. PV of all the other cash flows from 2014 to 2018, which
totals $423.69. PV of interest tax shield is $41.9335. Upon adding the PV of cash flows and the
PV of interest tax shield, and the PV of terminal value, the enterprise value totals $5794.56. After
finding the enterprise value, the net debt of $583.00 is subtracted to get the equity value of
$5211.56.
Please take a look at the tables below for number calculations and visuals.

Conclusion
Knowing the intense competitive nature of the beverage industry, it might seem prudent to
initially avoid a company such as this when it comes to buying. However, the lucrative billions
of dollars spent in this industry warrants an extensive second look into the Boston Beer
Company.
The company has an undeniable allure when it comes to how efficiently it conducts its operations
(mainly being able to maintain a large amount of working capital to support its rapidly growing
operations through investments towards PPE) and the growing amount of brand loyalty it holds
in the United States. Compared to its competitors, the Boston Beer Company is growing quite a
bit more in 2015 which signals a potential growing market share. The positive revenue and
income growth trends exhibited in our analysis based on historical financial documents and
examining a close peer group in the same type of industry to gauge market risk gives us the
necessary perspective about the advantages and any sort of disadvantages we would pick up if
we were to purchase this company.
Based on our projections, we see the company making further gains in the next five years in
regards to revenue/income growth. Alongside these impressive gains comes with greater cash
flows which would ramp up to meet the needs of a bustling operation.
Two equity values were ultimately founded; $3195.09m founded through discounted cash flows
and $5,211.56m from relative valuation which integrates a present value interest tax shield
amount of $41.93m alongside a terminal value of $5,328.94m. Basing an overall judgment on
what the Boston Beer Company can potentially provide to us as potential owners, the carefully
built up equity values supported by historic data, peer group data and discounted cash flows
allows us to conclude the Boston Beer Company as a very worthy buy.

Works Cited
http://www.bostonbeer.com/phoenix.zhtml?c=69432&p=irol-fundIncomeA
http://www.forbes.com/companies/boston-beer/
http://www.gurufocus.com/term/wacc/SAM/Weighted%252BAverage%252BCost%252BOf
%252BCapital%252B%252528WACC%252529/Boston%2BBeer%2BCo%2BInc
http://www.thestreet.com/files/r/ratings/equities/SAM_weiss.pdf
http://www.slideshare.net/ss7424/boston-beer-company-valuation
https://swallin.wordpress.com/2011/12/12/the-boston-beer-company-from-radical-marketing-toradical-change/