thavi ekanayake - s3. · pdf fileunique positioning in the beer market ... beer brewing...

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SAM BREW TAP STZ

Q3 2011 EPS

Company Snapshot

PEG (5-year expected) 2.75

Beta 0.65

52-week range $71-$115.49

Margin of Safety 18%

P/E (ttm) 27.68

P/S (ttm) 2.60

P/B (mrq) 7.24

EV/EBITDA (ttm) 12.49

ROE (ttm) 37.71%

EPS (ttm) $3.78

Shares Outstanding 12.68 million

SAM BREW TAP STZ

Times

Interest

Earned

330.00 13.43 5.68 2.86

Return

on

Assets

24.3% 5.9% 5.4% 7.8%

Return

on

Equity

35.9% 9.0% 8.8% 21.9%

TATO 1.89 0.72 0.28 0.40

Thavi Ekanayake

Miro Getov

Nino Naridze

Investment Recommendation: BUY 1,000 shares at $104.34 for a NAV of $104,340

Great prospects for growth

No long-term debt

Unique positioning in the beer market

Popular brand name

Innovations in beer and operations

The Boston Beer Company (SAM) COMPANY VALUATION

Student Managed Fund | Stock Proposal Spring 2012 2

Table of Contents

Qualitative Analysis

Historical Snapshot ............................................................................................................................... 2

Product Portfolio Timeline ................................................................................................................... 2

Boston Beer Company Today .............................................................................................................. 3

Innovative Strategies .............................................................................................................................. 3

Competitors in the Microbrewery Segment ......................................................................................... 4

Competitors in the Stock Market ...................................................................................................... 4-5

Potential Risks ....................................................................................................................................... 6

Awards and Recognitions ...................................................................................................................... 7

Recent News .......................................................................................................................................... 8

SWOT Analysis Sums Up the Performance of The Boston Beer Company .................................... 9

US Economy ....................................................................................................................................... 10

Factors Influencing the Industry ......................................................................................................... 10

Beer Brewing Industry ........................................................................................................................ 11

Better Beer Sub-Industry .................................................................................................................... 11

Inter-Industry Competition ................................................................................................................. 12

Porter’s Five Forces ............................................................................................................................. 13

Quantitative Analysis

Trends from Current Financial Statements .................................................................................. 14-15

Pro Forma Income Statement Assumptions ................................................................................. 16-17

The Resulting Pro Forma Income Statements for 2012 ................................................................... 18

Comparative Income Statement Figures 2009-2012 .......................................................................... 19

Pro Forma Balance Sheet Assumptions ........................................................................................ 20-21

Pro Forma Balance Sheets 2010-2012 ............................................................................................... 22

Financial Ratios .............................................................................................................................. 23-26

Market-based Valuations ................................................................................................................ 27-30

Discounted Cash Flow Model ....................................................................................................... 31-32

H-Model DCF Valuation .................................................................................................................... 33

Residual Income Valuation ............................................................................................................ 34-35

Analyst Opinion .................................................................................................................................. 36

Conclusion ........................................................................................................................................... 37

Appendices .................................................................................................................................... 38-43



Historical Snapshot1

In 1983, James Koch and his former secretary Rhonda Kallman

started The Boston Beer Company after raising additional capital

from family and friends. Originally, the Company contracted with

Pittsburg Brewing to make beer using Koch’s great-great-

grandfather’s home brewing recipe. After steadily solidifying its

roots in the craft-brewing subsector and expanding to the Western

U.S. through new contractor breweries, in 1997 Boston Beer stepped into hard cider market,

launching HardCore Cider, and purchased a small brewery in Cincinnati. A year later, Boston

beer crossed the U.S. boundaries and started distributing its beer in Japan and Australia.

Product Portfolio Timeline2

1984 – Introduced a “Flagship” brand of Samuel Adams Boston Lager

1996 – Released LongShot line of beers

1997 – Moved into hard cider market and launched HardCore Cider brand

1998 – Expanded distribution to Australia and Japan

1999 – Introduced Millennium Ale

2000 – Launched BoDean's Twisted Tea, a malt-and-tea based beverage

2001 – Started a new beer line, Sam Adams Light, that sold in most of its top U.S. markets

2003 – Placed on the market Utopia brew, a beverage with 25% alcoholic content

2003 – Released a limited edition of Samuel Adams Chocolate Bock

2004 – Added Chocolate Bock to the section of Extreme Beers that already included

Millennium and Triple Bock

2007 – Contracted with City Brewing in order to brew City’s Latrobe brand beer

2010 – Launched limited edition ale, Infinitum, which was developed in Germany's

Weihenstephan Brewery, the world’s oldest brewery

2011 – Introduced Samuel Adams Scotch Ale, Samuel Adams Revolutionary Rye Ale, and

Samuel Adams White Ale

2011 – Developed and launched three new ciders under the brand of Angry Orchard

2011 – Released a new beer, “Boston 26.2 Brew”, to commemorate 115th Boston Marathon

1 Hoovers.com

2 Hoovers.com, bostonbeer.com



Boston Beer Company Today3

Today, The Boston Beer Company is recognized as the

largest microbrewer in the U.S. Over the course of its

existence, it has acquired breweries in Cincinnati,

Boston, and Breinigsville, Pennsylvania. In addition to

producing beer through contractor breweries, SAM

brews its own beer in its three locations.

In 2011, Boston Beer sold around 2.5 million barrels of alcoholic beverages, a 9% increase from

the prior year. Evidently, after the tough economic environment of 2008, the Company was able to

rebound its sales rather fast and regain its position in the market.

SAM operates in the Better Beer sub-segment and directly competes with imported beers like

Heineken and Corona. The core beverages that compose the majority of its income are Samuel

Adams Brewmasters Collection, Samuel Adams Boston Lager, Samuel Adams Seasonals, and its

Twisted Tea drinks. These beverages can be obtained in most of the grocery stores, bars and

restaurants and other retail outlets.

Innovative Strategies4

The Better Beer sub-industry has experienced increasing competition from the wine and spirits

category. In order to maintain its competitive advantage, the Company follows the strategy of

periodically offering seasonal beer, introducing limited edition beverages and temporarily

discontinuing different lines of beers. For instance, in 2010 SAM discontinued Samuel Adams

Honey Porter and Twisted Tea Green Citrus Hard Iced Tea, which might be reintroduced or

appear as part of a variety pack. This way, SAM keeps the consumers anticipating and thus

increases brand loyalty, which is essential for the success in the better beer category.

The Boston Beer Company also tries to develop its beer product lines not only through

internal research and development process, but through direct input of the customers as well.

SAM promotes the annual LongShot American Homebrew Contest where the customers and

employees can submit homebrews for inclusion in the LongShot six-pack in the following year.

Boston Beer pioneered ground-breaking innovation into the craft beer industry

(microbreweries and quality imports) through the Freshest Beer Program. The program

reduces the wholesaler’s beer inventory up to a week, increasing the freshness of the beers at

the retail and restaurants. Moreover, SAM does not keep warehoused beer at the brewery,

since all the beer brewed is pre-ordered by distributors. Currently, SAM has 50% of its volume

on the Freshest Beer Program and is hoping to increase this number to 75% by the end of

2012.

3 Hoovers.com, Standard & Poor’s Net Advantage

4 The Boston Beer Company 2011 10K Report



Competitors in the Microbrewery Segment:

Competitors in the Stock Market

Craft Brew Alliance (BREW)

Craft Brew Alliance is a company consisting of

three distinct breweries: Redhook Ale Brewery,

Widmer Brothers Brewing, and Kona Brewing

Company. Redhook has two operations, in

Woodinville, Washington, and in Portsmouth, New

Hampshire. Redhook comes in many different

varieties: Pilsner, IPA, Copperhook, and Nut

Brown. Widmer has one brewery, operating in Portland, Oregon. Widmer is available in Pale Ale,

Hefeweizen, Blonde, and Black IPA. Kona joined the Craft Brew Alliance most recently, in 2010.

Kona has one brewery, operating out of Hawaii’s Big Island. Their brands include Longboard

Lager, Fire Rock Pale Ale, Wailua Wheat Ale, and Koko Brown.

Craft Brew Alliance has 600 employees, revenues of $149.2 million, and EPS of $0.51 for FY

2011.

Mendocino Brewing Co (MENB)

Mendocino was founded in 1983 in Hopland,

California on the site of the second brewpub

opened in the US after the end of Prohibition.

The company has an iconic status within

microbreweries because of its history and its

brands, which include Red Tail Ale, Blue Heron

Pale Ale, Imperial IPA and Kingfisher. The last

brand is produced by Mendocino’s wholly-owned subsidiary in the UK. Kingfisher is distributed in

55 countries, most of which are in Europe. Mendocino’s other brands are available only in 43 of

the 50 states.

Mendocino has 65 employees, revenues of $40 million, and EPS of $0.08 for FY 2011.

Competitor Annual Sales Breweries Employees Famous Brand

North American Breweries $54.5 mil 4 572 Magic Hat #9

Deschutes Brewery, Inc.

New Belgium Brewing Company, Inc. $44.34 mil

$37.5 mil

1 1

270 210

Jubelale Fat Tire



Molson Coors Brewing Company

(TAP)

Molson Coors is the fifth-largest brewer in the

world, with 18 breweries in the US, Canada, UK

and one in China. The company has created a joint

venture with SABMiller called MillerCoors, and

through it markets brands such as Coors Light,

Blue Moon, Pilsner Urquell, Keystone, Miller

High Life, and Grolsch in North America, Europe,

Turkey, Russia, China, Japan and the Philippines. Along with AB InBev, TAP accounts for 90%

of domestic beer production. In 2010, two out of the Top 10 beer brands ranked by sales

belonged to Molson Coors.

Molson Coors has 14,660 employees, revenues of $3,515 million, and EPS of $3.63 for FY

2011.

Constellation Brands, Inc. (STZ)

Constellation Brands is a wine, beer and spirits

company that emphasizes on the perceived quality

of its products. It was founded in 1945 as a

distributor of bulk wine to bottlers. Throughout

the years the company grew through the

acquisitions of other wine companies and today is

the leading wine company in the US, Canada, and overall in the world. The company is based in

New York State and operates in 125 countries. The company’s joint venture with Grupo Modelo,

the leader of the Mexican beer market, allows it to import Corona, St. Pauli Girl and Tsingtao on

the US market. Corona is one of the top competitors to Sam Adams in the Better Beer market,

and SAM’s Twisted Tea® and cider beverages target the same markets as the majority of STZ’s

brands. Wines and spirits accounted for 58% of the revenue in FY 2011, while the Crown Imports

joint venture brought in the remaining 42%.

Constellation Brands has 4,300 employees, revenues of $3,332 million, and EPS of $2.67 for

FY 2011.



Potential Risks5

When considering investing in a certain stock, investors should take into account the risks that the

company bears. The table below describes SAM’s potential risks for investors’ consideration.

* Company Risks column outlines the risks mentioned in the sources below.

** Countermeasures column indicates the possible countermeasures that SAM could take to

battle or avoid mentioned risks.

5 Scottrade, Morningstar, Thomson Reuters, Craftbrew.com, Value Line, Molsoncoors.com, SAM 10-K, S&P Industry Report on

Alcohol and Tobacco, Hoovers, Mendobrew.com, Cbrands.com

Company Risks * Countermeasures**

Competition from larger beer companies Emphasizing “microbrewery” image to

distinguish self and drive up sales.

Achieving unique positioning by having

higher-quality products than larger beer

conglomerates and having larger operations

than any other microbreweries.

Freshest Beer Program might adversely affect

short-term operating results

None but expect to derive future benefits

from the program, such as reduced

inventory costs and lower expenses on

buying back stale beer.

An increase in hops price coupled with existing

hops purchase commitments

None. The Company is vulnerable to price

increase in inputs.

Currency fluctuations might cause losses on

contracts payable in Euros and Pounds Sterling

Regularly reviewing a possibility to hedge

currency exposure.

Class B Stock might influence the company’s

decisions, since it is exclusively held by one

person

None, since C. James Koch is the Chairman

of the Board of Directors, and would

(hopefully) have the best interest of the

company in mind.



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Coors

Keystone

Bud Light Miller Lite

Long Trail Pale Ale

Heineken

Smirnoff Ice Twisted Tea

Mike's Hard Lime

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Carlsberg Elephant

Magic Hat Circus Boy

Sierra Nevada

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Sam Adams

Awards and Recognitions6

SAM was voted as the “The Best Beer in America”:

The Great American Beer Festival's Consumer Preference Poll announced SAM as "The Best

Beer in America". Since 2000, Samuel Adams has won more awards in international beer

tasting competitions than any other brewery in the world.

Boston Beer Company holds a World Guinness Record for extraordinary beer with high

alcohol volume

“Never satisfied just to make his own version of existing beer styles, Jim pioneered the extreme

brewing movement in the early-1990s, and holds a record in the Guinness Book of World

Records for Samuel Adams Utopias, an extraordinary beer with high alcohol by volume.”

Boston Beer Company Receives Founders Award for Corporate Philanthropy

“Congratulations to The Boston Beer Company for receiving this years’ Founders Award at

the 10th Annual Excellence Awards in Corporate Philanthropy for their Samuel Adams

Brewing the American Dream Loan Fund in partnership with ACCION USA. For those who

aren’t familiar with our work together, ACCION USA and the Boston Beer Company have

been working for the last two years to provide New England small business owners in the food

and beverage industry with the resources necessary to grow independently”

According to “Beer Me”, a website consisting of brewery information worldwide, SAM’s

beers have won a plethora of awards. You can find a partial list in the Appendix 2.

As you can see from the graph below, the recognitions SAM has received for its beer

translate into a high price and high quality position, which turns into a positive perception

from the customers.7

6 Bostonbeer.com

7 The prices on the graph were acquired from www.capecodpackagestore.com

http://www.samueladams.com/age-gate.aspx?ReturnUrl=%2findex.aspx

http://www.corporatephilanthropy.org/events/excellence-awards/winners.html



Recent News6

Boston Beer Reports Fourth Quarter

2011 Results

February 22, 2012

“The Boston Beer Company, Inc. (NYSE:

SAM) reported net income for the fourth

quarter of $17.8 million, or $1.33 per diluted

share, an increase of $5.6 million, or $0.46

per diluted share, from the fourth quarter of

2010. This increase was primarily due to

increased core shipment volume and the

favorable impact of a state income tax

settlement in the fourth quarter, partially

offset by increased advertising, promotional

and selling expenses.”

Alchemy & Science Joins Forces with

The Boston Beer Company

January 24, 2012

“Alan Newman, who founded Magic Hat

Brewing in 1994, and Jim Koch, founder and

brewer of The Boston Beer Company, have

been friends and colleagues for more than 15

years. Recently, they met over a beer, and

Jim urged Alan to return to the craft beer

industry. They talked about how they might

collaborate. Out of this came Alchemy &

Science, a craft brew incubator

headquartered in Burlington, Vermont, that

will be funded by Boston Beer Company.

Newman is joined in this venture by Stacey

Steinmetz, his longtime business associate

from Magic Hat.”

Samuel Adams Adds Cheer to Patriot’s

Day In Honor of the 2012 Boston

Marathon

February 23, 2012

“The Boston Beer Company, brewers of

Samuel Adams® beers, announced today

that it’s helping to celebrate one of Boston’s

greatest traditions – The Boston

Marathon. The brewery will be the official

beer sponsor of the 2012 Boston Marathon,

one of the most revered and challenging

races in the world. To celebrate, the Samuel

Adams brewers are developing a special

commemorative beer to mark the heralded

event. This is the first time Samuel Adams

has partnered with the Boston Athletic

Association for the Marathon”

The biggest brewers slipped in 2011

January 16, 2011

“A regional brewer from Pennsylvania saw

big improvements in shipping in 2011, while

giants of the industry saw shipments fall, a

trade newsletter said. The behemoths of

Anheuser-Busch, MillerCoors and Heineken

USA all saw shipments fall in 2011.

Anheuser-Busch saw a 2.9 percent drop in

shipments, while MillerCoors saw a 3 percent

drop, a newsletter from Beer Marketer's

Insights said”

“But Yuengling, a regional beer out of

Pottsville, Pa., had shipments rise 16.9

percent. Another small firm, Boston Beer

Co., which makes Samuel Adams beers,

shipped 8 percent more suds in 2011 than it

did in 2010, the newsletter said.”



SWOT Analysis Sums Up the Performance of The Boston Beer Company: 8, 9

Strengths:

Brand Name: A strong brand name helps SAM stay near the top of the Better Beer sub-

industry. The Company is going to spend $8-$12 million dollars more next year on advertising

and selling. One distinct strategy the Company uses to keep customers loyal to their brand

name is to continuously offer new beverages while temporarily discontinuing others.

Freshest Beer Program: Aims at shortening the time beer spends as inventory, so that it is

fresher when it arrives at the final customer. The Company expects to benefit from this in the

future, but for now is incurring a large amount of implementation costs.

Alchemy and Science: This is the Company’s R&D subsidiary. It aims to expand the flavors

and techniques of their beer.

Tangible Assets: 99% of the Company’s book assets are tangible and contribute to revenue

production. SAM has no group of “hot air” assets on its books.

Weaknesses:

U.S.-based: SAM relies almost entirely on sales from U.S, and it does not look like the

Company is going international just yet

Piles of Cash, No Debt: SAM does not make the best use of its short-term funds and ability to

borrow. We can see that with the excessive amount of cash on its balance sheet, which is ⅓ of

its net fixed assets, and with the absence of any long-term debt. The Company might be

missing out on an even lower WACC if they took on more debt, which would most probably

not impair their ability to repay obligations.

No dividends: The Company does not pay dividends

Opportunities:

Market Leader: As the largest microbrewer in the U.S., SAM has some ability to dictate pricing

in the sub-industry as well as to invest large amounts in innovation

International Expansion: SAM will greatly benefit from contracting Sam Adams beer to be

produced in other countries, most notably Germany

Expansion Beyond Beers: Twisted Tea and ciders help diversify the company into the wines &

spirits market, which covers more diverse customer groups than beers

Threats:

Intruders: New entrants in the Better Beer market, such as beer industry giant AB InBev,

have increased competition and the need for product differentiation.

Acquisition Target: The large companies in the industry are expanding through inorganic

growth, and it is possible that one of them might try to acquire SAM, with all the excess cash it

has on its balance sheet.

Currency risks: SAM currently does not hedge its foreign currency contracts for hops.

8 Bostonbeer.com - 2011 10-K Report

9 Standard & Poor’s NetAdvantage



U.S. Economy10

Alcoholic beverages are generally considered as “staples” which means that overall the companies

within this industry have stable sales regardless of the economic conditions. Yet sub-industries are

rather segmented out in the alcoholic beverage market, therefore it is important to consider

economic indicators like real GDP, real DPI, and CPI.

Real GDP – growth in the inflation-adjusted Gross Domestic Product is a measure of the

health of the economy. U.S. Department of Commerce reported an YTD real GDP growth

of 1.7% in 4th

quarter 2011, while Standard & Poor’s Economics Department was forecasting

a real GDP rise of 1.9% in 2012.

Real DPI – real Disposable Personal Income shows the inflation-adjusted income after taxes

and indicates how much buyers spend on consumer goods. Bureau of Economic Analysis

estimates the 1.4% YTD change in U.S. DPI.

CPI - Consumer Price Index measures the fluctuation in the price of the consumer basket

of goods and services. This consequently influences the pricing trends in the alcoholic

beverage industry. The CPI for all consumer products increased 0.4% in February 2012

form last month due to the sharp increase in the gasoline prices.

Factors Influencing the Industry 11

Government – regulations concerning purchasing and distribution of the alcoholic beverages

continue to be one of the restraints to the entities in alcohol business. Yet the most current

regulations have had a minimal impact on the firm’s margins since most of the states retain

power to dictate in-state regulation on such matters.

Globalization – expanding trade borders and merger of international producers of alcoholic

beverages allow the U.S. alcoholic beverage industry to remain highly profitable and

outperform the market. Compared to the low 12%-14% operating margins of the Packaged

food companies, the U.S. alcoholic beverage companies on average enjoy operating margins

as high as 20%.

Emerging Markets – to battle competition, U.S. alcoholic beverage companies strive to take

advantage of the improved distribution capacity, increase diversification, and realize cost

savings through acquiring or merging with the foreign companies. The current spotlight is on

China, Eastern Europe, and Latin America, where the presence of U.S. firm partnership has

increased exponentially since 2004.

10

9Standard & Poor’s Net Advantage



Beer Brewing Industry12

SAM operates in the beer brewing industry which has reached its mature stage. Its highly

concentrated environment includes the two brewing giants, Anheuser-Busch InBev and

MilerCoors LLC, that collectively take up over 90% of the beer production in the U.S. SAM

competes in the Better Beer sub-industry which means that the Company also competes with most

imports.

Better Beer Sub-Industry13

The Better Beer category (that mostly includes microbreweries) has experienced a strong growth of

15% in 2011. Analysts see this as the increase in the product demand that will aid the Company’s

brands, which are the third largest, behind the imports Corona and Heineken. SAM’s products

also compete within the wine and spirits markets, both of which gained market share due to the

domestic brewers like The Boston Beer

Company.

Despite the neutral outlook for the other

beer categories, the Better Beer category

continues to take advantage of favorable

pricing and is believed to increase prices

even further within the next 12 months.

Yet, the challenges still persist due to the

strong presence of the established

imported beers. Additionally, the

competition is tense because of close

pricing and specific target customers, thus

the competition is expected to remain

tense. In 2011 the Better Beer category

was up 6%, while total beer category was

down 1% to 2%. Overall, the craft industry

is expected to outperform the industry

despite of the trend of increasing

commodity prices.

As you can see from the table above, The Boston Beer Company remains a leader among the

local craft brewers in terms of sales and market share. Its strong brand equity and loyal customers

allow Boston Beer to keep the lead in the Better Beer sub-industry.

12, 11

Standard & Poor’s Net Advantage, Boston Beer Company 2011 10-K



Inter-Industry Competition14

SAM also competes within the flavored malt beverage (FMB) category of the beer industry through

its Twisted Tea product line. Based on information for the 2011 10-K report, the FMB category

comprises approximately 2% of United States beer consumption. FMB includes flavored malt

beverages like Twisted Tea, Smirnoff Ice, and Mike’s Hard Lemonade, which usually are priced

competitively with Better Beers.

The graph above demonstrates the results of a Gallup Poll in 2011, presented by Beer Institute.15

As we see, the competition from wines has increased since 1992 and peaked in 2005, when the

preference for wine was higher than that for beer. Although in 2011 the survey participants

preferred beer over wine and liquor, the competition between beer and wine lovers seems very

tight.

Thus, we see that the Better Beer category faces fierce pressure from malt beverages and wines

that target similar demographics and carry similar prices. But on the bright side, the craft beer

segment has an advantage over the general beer category and has very promising growth prospects,

as illustrated in the table below:16

14

Bostonbeer.com - Boston beer Company 10-K 15

Beer Institute, Gallup Poll, 2011: Do you most often drink beer, wine, or liquor? 16

Beer Institute, 2011 (Beer Marketers Insights, Discus, Beverage Information Group)

Wine Liquor Beer

Tiers Share Growth Share Growth Share Growth

High 26% 21% 24% 5% 17% 7%

Middle 33% 16% 36% 2% 54% -2%

Low 41% -14% 40% 0% 28% -3%

Total 100% 2% 100% 2% 100% -1%

0%

10%

20%

30%

40%

50%Beer Wine Liquor 41% v 32%

36% v 35%



Porter’s Five Forces

Threat of substitute products: MODERATE

Although beer is a rather different beverage compared to liquor and has its own set of customers

who favor it over any other hard liquor, there is a substantial chance of substituting beer for other

alcoholic beverages. Yet, since SAM also offers other types of alcoholic beverages like HardCore,

it has diversified the risk of its beer products being substituted.

Threat of new entrants: LOW

Brewing beer is a very specialized business and requires not only exceptional level of expertise but

necessary connections within the supplier and distribution networks. Although the capital

requirements for setting up a brewery are not extremely high, the cost of brewing is high, so the

threat of new entrants into the beer brewing sub-industry is low.

Bargaining power of buyers: LOW

Switching cost for the Better Beer buyers is quite low and the substitute products are readily

available in the form of other alcoholic and nonalcoholic beverages. Yet, the uniqueness of beers is

very important and demand for beer products is based on the strong preference from the buyer’s

side. Moreover, buyers have no direct influence on the supply, therefore the bargaining power of

buyers can be classified as low.

Bargaining power of suppliers: LOW

The suppliers in the beer industry do not have much power, since the inputs needed for the beer

brewery are fairly stable in price, while the suppliers in the market are abundant. Furthermore, the

switching costs for the breweries are not very high, and therefore the supplier power is low.

Competitive Rivalry: MODERATE

The rivalry in the beer market is quite high since the market is driven by the competition on the

local, national and international level. The beer companies compete with imported beers from all

over the world, some of which have a rather established presence in the U.S. beer industry. With

this being said, it is hard to substitute one brand for another because of the solid fan followings

some brands such as Boston Beer’s have.



$84,278

$128,701

$110,467 $126,108

$88,331

$128,785

$118,851 $117,479

$102,470

$141,158 $135,957 $126,285 $111,409

$146,014 $147,002 $153,857

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Cost of Goods Sold (As % of Revenues)

Trends From Current Financial Statements:



Revenues have historically been the weakest in the first quarter, after which they have shot up to a year’s high in Q2 and then

gradually declined to a level higher than Q1 for the last two quarters. The last quarter of 2011 broke this pattern by setting a record

for sales, which may or may not be replicated in the future. What we can be sure of is that revenues for every quarter have been

growing throughout the years, with a notable jump from 2009 to 2010, followed by a gradual rise in 2011.

The cost of goods sold as a percentage of revenues has historically been the highest in Q1, followed by Q3, Q2 and lastly by the

volatile Q4. Most importantly, the percentage for the first three quarters has been declining over the years.

Earnings Per Share have drastically increased, especially if we compare years 2008 and 2011. Although EPS in the first two quarters

of 2010 exceeded EPS of the first two quarters in 2011, the EPS soared towards the end of the year and exceeded Q4 of 2010 by 0.5

in 2011.

-0.27

0.61

-0.02

0.26 0.1

0.85 0.74

0.52

0.45

1.18 1.14

0.9

0.3

0.57

1.26

1.4

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

EPS in $ (Excluding Non-recurring Items)



Pro Forma Income Statement Assumptions:

Seasonality is the strongest factor to consider when projecting revenues for beer companies, which

is why we have broken down the pro forma income statement for 2012 into four quarters.

For our projections, we used the following reasoning for each scenario:

Pessimistic – Revenues will increase at a small rate, the same one by which the rest of the Better

Beer sector is growing. Cost of goods sold will not improve, but will stay at the 2011 level.

Advertising, promotional and selling expenses will grow by two percent from last year for all

quarters. All of these items were adjusted up or down depending on the historical performance of

the quarter they were in. General and administrative expenses will stay at a four-year historical

average.

Most Likely – Revenues will increase at a rate that is closer to the rate for the last two years. Cost of

goods sold will follow the historical trend and decrease by one percent. Advertising, promotional

and selling expenses will grow by four percentage points, as part of management’s efforts to in

search of higher sales. All of these items were adjusted up or down depending on the historical

performance of the quarter they were in. General and administrative expenses will again stay at a

four-year historical average.

All the values by which we increased revenues and calculated expenses for each quarter are

summarized in the following tables:



Pessimistic Scenario:

Q1 Q2 Q3 Q4

Growth Total Revenues 8.0% 6.0% 8.0% 7.0%

As

% o

f

Rev

enu

e Excise taxes 8.4% 8.4% 8.4% 8.4%

Cost of goods sold 44.7% 39.6% 40.0% 40.3%

Advertising, promotional and selling exp. 33.9% 29.7% 28.8% 29.2%

General and administrative expenses 9.2% 7.4% 7.4% 7.8%

Provision for income taxes as % of EBT 38.0% 38.0% 38.0% 38.0%

Most Likely Scenario :

Q1 Q2 Q3 Q4

Growth Total Revenues 12.4% 6.5% 11.3% 14.7%

As

% o

f

Rev

enu

e

Excise taxes 8.4% 8.4% 8.4% 8.4%

Cost of goods sold 43.7% 38.6% 39.0% 39.3%

Advertising, promotional and selling exp. 35.9% 31.7% 30.8% 31.2%

General and administrative expenses 9.4% 7.5% 7.1% 8.1%

Provision for income taxes as % of EBT 38.0% 38.0% 38.0% 38.0%

As a conservative estimation, we excluded all non-recurring items from our pro forma income

statement. These items are:

A gain of $20.5 million from a court settlement in Q2 2011. This reduced the 2011 EPS from

$5.08 to $3.53.

Any projections for other income or expense for 2012.

$3 million of packaging services revenue from contracts with MillerCoors and Nestle Vitality,

which the Company does not expect to renew in 2012, which reduced our estimated 2012

EPS by $0.24.



The Resulting Pro Forma Income Statement for 2012:

Pessimistic Scenario: In $ Thousands

Q1 2012 Q2 2012 Q3 2012 Q4 2012

Revenue $120,322 $154,775 $158,762 $164,627

Less excise taxes $10,057 $12,937 $13,270 $13,760

Net revenue $110,265 $141,838 $145,492 $150,867

Cost of goods sold $53,786 $61,357 $63,485 $66,303

Gross profit $56,478 $80,481 $82,007 $84,564

Operating expenses:

Advertising, promotional and selling expenses $40,759 $46,045 $45,656 $48,122

General and administrative expenses $11,123 $11,413 $11,809 $12,868

Total operating expenses $51,883 $57,458 $57,465 $60,991

Operating income $4,596 $23,023 $24,542 $23,573

Provision for income taxes $1,746 $8,749 $9,326 $8,958

Net income $2,849 $14,274 $15,216 $14,615

Net income per common share basic $0.23 $1.13 $1.21 $1.16

Net income per common share diluted $0.16 $1.06 $1.14 $1.09

Most Likely Scenario: In $ Thousands

Q1 2012 Q2 2012 Q3 2012 Q4 2012

Revenue $125,185 $155,540 $163,552 $176,419

Less excise taxes $10,465 $13,003 $13,673 $14,749

Net revenue $114,719 $142,537 $149,879 $161,671

Cost of goods sold $50,132 $55,076 $58,438 $63,488

Gross profit $64,587 $87,460 $91,441 $98,183

Operating expenses:

Advertising, promotional and selling expenses $41,156 $45,254 $46,099 $50,492

General and administrative expenses $15,000 $16,000 $15,000 $17,000

Total operating expenses $56,156 $61,254 $61,099 $67,492

Operating income $8,431 $26,206 $30,342 $30,691

Provision for income taxes $3,204 $9,958 $11,530 $11,663

Net income $5,227 $16,248 $18,812 $19,028

Net income per common share basic $0.42 $1.29 $1.49 $1.51

Net income per common share diluted $0.16 $1.06 $1.14 $1.09



Comparative Income Statement Figures 2009-2012

SAM 09-12 In $ Thousands

2009 2010 2011 2012

Pessimistic

2012 Most

Likely

Revenue $ 453,446 $ 505,870 $ 558,282 $ 595,606 $ 617,816

Less excise taxes 38,393 42,072 45,282 50,025 51,890

Net revenue 415,053 463,798 513,000 545,581 565,926

Cost of goods sold 201,235 207,471 228,433 244,930 227,134

Gross profit 213,818 256,327 284,567 300,651 338,791

Operating expenses:

Advertising, promotional and

selling expenses

121,500 135,737 157,261 180,582 183,001

General and administrative

expenses

36,938 39,112 43,485 47,214 63,000

Total operating expenses 159,547 175,149 201,412 227,796 246,001

Operating income 54,271 81,178 83,155 72,854 92,790

Other income:

Interest income 112 79 54 - -

Other income (expense), net: (16) (149) (209) - -

Total other income (expense),

net

96 (70) (155) - -

Income before provision for

income taxes

54,367 81,108 83,000 72,854 92,790

Provision for income taxes 23,249 30,966 37,441 28,779 36,355

Net income 31,118 50,142 45,559 44,075 56,436

Net income per common share

basic

2.21 3.67 3.53 3.50 4.48

Net income per common share

diluted

$ 2.17 $ 3.52 $ 3.26 $ 3.13 $ 4.11



Pro Forma Balance Sheet Assumptions – Assets:

Cash – We reduced cash by $21 million to account for the completion of the Company’s

share buyback program. However, this was more than offset when we used Cash as the plug

for Assets to equal Liabilities and Stockholders’ Equity, which resulted in a net increase in

cash of $16.13 million

Accounts Receivable – We do not expect significant changes, so this is an average of historical

values.

Inventories – The Freshest Beer Program will reduce inventories for wholesalers by two

weeks, and it should also reduce inventory for the Company itself. For 2011, SAM carried

54.5 days of inventory on its books. Participating wholesalers are expected to increase from

50% to 75% in 2012, so we estimated that one quarter of the inventory will be reduced from

54.5 to 40.5 days. This gives us a weighted new days sales inventory of 51 days (using 0.75 x

old DSI + 0.25 x new DSI). We applied this ratio to the projected 2012 cost of goods sold in

order to arrive at inventories.

Prepaid Expenses – We do not expect significant changes, so this is an average of historical

values.

Deferred Income Taxes – We do not expect significant changes, so this is an average of

historical values.

Property, Plant and Equipment – The Company plans significantly higher capital

expenditures in 2012 at $40 to $60 million, up from almost $20 million in 2011. Our median

estimate increase in PPE of $50 million was partially offset by the expected depreciation for

2012 of $19 million.

Other Assets – We do not expect significant changes, so this is an average of historical values.

Goodwill – The Company acquired through its Alchemy and Science subsidiary Angel City

Brewing Company for an estimated $1.8 million. There is no publicly available information as

to the premium paid on the acquisition, if any. Thus, we kept the same amount of Goodwill

on the books as last year.



Pro Forma Balance Sheet Assumptions – Liabilities:

Accounts Payable – We do not expect significant changes, so this is an average of historical

values.

Accrued Expenses – We do not expect significant changes, so this is an average of historical

values.

Long-term Debt – We do not expect to see this item on the balance sheet any time soon. Any

expansions will most probably be funded by cash. The Company has an existing $50 million

revolving credit facility, which at fiscal year-end 2011 had no outstanding amounts.

Deferred Income Taxes – We do not expect significant changes, so this is an average of

historical values.

Other liabilities – We expect this account to decrease by $1,122,000 due to the repayment of

a lease obligation.

Pro Forma Balance Sheet Assumptions – Stockholder’s Equity:

Class A Common Stock – We are expecting a $21 million share buyback, which can be

estimated to occur at a price close to $100, around which the stock has been fluctuating lately.

Since the stock has a par value of $0.01 and the estimated amount of shares bought back is

210,000, we expect this account to decrease by $2,100.

Class B Common Stock - We do not expect any changes in the balance of this account.

Additional Paid-In Capital – Historically, this account has grown steadily because of the

exercise of stock options, issuance of stock awards and stock-based compensation. Last year,

all of these items increased the account by $16,320,000, and we expect at least the same

amount for next year.

Accumulated Other Comprehensive Loss – This account changes primarily due to the three

defined benefit plans for employees, established in 1991, and the retiree medical plan. Boston

Beer Company has had to contribute to these programs $400,000 in 2011 and $79,000 in

2010. We assumed that next year the Company will have to contribute the average of the last

two years’ amounts.

Retained Earnings –We added to this account the projected net income for 2012, which was

30% of our pessimistic estimate added to 70% of our most likely estimate, a total of

$52,727,480. We decreased that by the difference between the price paid for the shares and

the par value, which is $20,997,900. The overall change to this account is an increase of

$31,729.580.



Pro Forma Balance Sheet 2010-2012

In $ Thousands

2010 2011 2012

Assets

Cash and equivalents $ 48,969 $ 49,450 $ 65,580

Accounts Receivable $ 20,017 $ 23,233 $ 19,427

Inventories $ 26,614 $ 34,072 $ 36,623

Prepaid expenses $ 12,756 $ 14,605 $ 11,101

Deferred income taxes $ 3,648 $ 4,363 $ 3,452

Total Current Assets $ 112,004 $ 125,723 $ 136,183

PPE $ 142,889 $ 143,586 $ 174,586

Other assets $ 2,260 $ 1,802 $ 2,000

Goodwill $ 1,377 $ 1,377 $ 1,377

Total Assets $ 258,530 $ 272,488 $ 314,146

Liabilities

Accounts Payable $ 19,423 $ 18,806 $ 20,279

Accrued Expenses $ 52,776 $ 48,243 $ 47,351

Total Current Liabilities $ 72,199 $ 67,049 $ 67,630

Long-term Debt $ - $ - $ -

Deferred Income taxes $ 17,087 $ 17,349 $ 11,741

Other liabilities $ 3,656 $ 3,345 $ 2,223

Total Liabilities $ 92,942 $ 87,743 $ 81,594

Stockholders' Equity

Class A Common Stock $ 93 $ 87 $ 84.90

Class B Common Stock $ 41 $ 41 $ 41

Additional Paid-In Capital $ 122,016 $ 138,336 $ 154,656.00

Accumulated comprehensive loss $ (438) $ (838) $ (1,078)

Retained Earnings $ 43,876 $ 47,119 $ 78,848

Total Stockholder's Equity $ 165,588 $ 184,745 $ 232,552

Total Liabilities and Equity $ 258,530 $ 272,488 $ 314,146



Financial Ratios

Liquidity – Above Average

2007 2008 2009 2010 2011

Current Ratio 2.29 1.03 1.53 1.55 1.88

Quick Ratio (Cash + AR) 1.88 0.40 0.99 0.95 1.07

Cash Ratio 1.32 0.13 0.75 0.68 0.73

SAM Peer Average BREW MENB TAP STZ

Current Ratio 1.88 1.66 1.08 0.77 1.66 3.14

Quick Ratio 1.08 0.77 0.50 0.50 1.41 0.64

Cash Ratio 0.73 0.22 0.02 0.02 0.84 0.01

Boston Beer Company has been steadily improving its liquidity over the last few years and will

have no problem covering its current liabilities, even using only cash and factoring of receivables. It

is one of the more liquid companies in the business – it consistently places second within its peers

and is well above the average for all three ratios. While the current ratio is not the 2.0 that William

Stone looks for in his two-minute drill, it is very close to that. MolsonCoors (TAP) is the only

company that has accumulated more cash to cover its liabilities.

Asset Management – Excellent

2007 2008 2009 2010 2011

Average Collection Period 19.23 16.49 15.65 15.74 16.36

Days Sales Inventory 43.38 38.63 46.26 46.79 54.43

Average Payment Period 42.42 34.37 45.90 34.13 30.42

Cash Conversion Cycle 20.19 20.75 16.01 28.40 40.38

Fixed Asset Turnover 7.39 2.69 2.82 3.25 3.56

Total Asset Turnover 1.73 1.81 1.58 1.79 1.89


Average Collection Period 16.36 51.88 38.42 41.85 75.37 45.72

Days Sales Inventory 54.43 36.61 46.20 26.77 36.87 233.33

Average Payment Period 30.42 60.34 55.44 71.78 53.80 22.02

Cash Conversion Cycle 40.38 28.15 29.18 -3.16 58.44 257.04

Fixed Asset Turnover 3.56 2.48 1.13 3.59 2.46 2.73

Total Asset Turnover 1.89 0.90 0.72 2.13 0.28 0.46



In the last five years, Boston Beer Company has decreased both the time it takes to disburse and

to collect payments. While the days sales inventory was at a constant level 2009-2010, the

implementation of the Freshest Beer Program increased this ratio to 54 days. We are expecting

that as the program continues to be implemented with more and more of Boston Beer Company’s

suppliers, the ratio will start decreasing. Because of the technical difficulties and the time needed to

develop reliable new procedures, we expect the ratio to start coming closer to that of peers during

2013. The days sales inventory is what is keeping the Company from having a cash conversion

cycle shorter than the average, because the two other ratios that go into CCC are much better. For

the purpose of the first four ratios, we have excluded STZ from the peer average.

Boston Beer Company is managing its fixed assets very effectively, squeezing out $3.56 for every

$1 in PPE. It is the leader among its peers, along with Mendocino (MENB). Mendocino has a

slightly higher total asset turnover, but Boston Beer Company is a close second, with more than

twice the peer average. This shows that SAM’s management knows how to get the most benefit out

of its assets. With TAP and STZ, we can see how the presence of goodwill and other intangible

assets brings down the asset turnover from over 2.0 to below 0.5.

Debt Management – Excellent

2007 2008 2009 2010 2011

Times Interest Earned -5.63 -4.00 311.00 501.00 330.00

Debt/Equity 0.48 0.57 0.52 0.56 0.48

ST Debt/Equity 0.45 0.48 0.43 0.44 0.36


Times Interest Earned 330.00 6.49 13.43 4.00 5.68 2.86

Debt/Equity 0.48 3.04 0.52 9.21 0.62 1.81

Short-term Debt/Equity 0.36 1.46 0.24 5.16 0.17 0.26

Over time, Boston Beer Company has had either negative interest coverage, meaning it had more

interest income than expense, or one that was in the few hundreds, effectively showing interest

expense was negligible. The debt-to-equity ratio has historically been around 0.50, meaning that

only one-third of assets were financed by debt and the other two-thirds by equity. The short-term

debt-to-equity ratio shows that the larger part of the obligations of the Company has borne a short-

term interest rate, if any, and also that the Company will probably have no trouble with any

obligations maturing in the longer term.

Compared to its peers, SAM is the industry leader by far. While it might have a slightly larger

short-term debt-to-equity ratio than some of its companies, the larger current obligations keep it

from amassing long-term obligations and debt-to-equity ratios of 3.0 or higher.



While the Company’s strategy regarding debt makes for a financially stable company, it might raise

some questions about profitability and the cost of capital. See Profitability, DuPont Analysis and

DCF Valuation for details.

Profitability – Excellent

2007 2008 2009 2010 2011

Gross Margin 55.4% 46.2% 51.5% 55.3% 55.6%

EBIT Margin 11.0% 3.4% 13.1% 17.3% 20.1%

Net Profit Margin 6.6% 2.0% 7.5% 10.8% 12.9%

Return on Assets 11.4% 3.6% 11.8% 19.4% 24.3%

Return on Equity 16.8% 5.7% 18.0% 30.3% 35.9%


Gross Margin 55.6% 34.0% 30.7% 27.9% 41.7% 35.7%

EBIT Margin 20.1% 16.7% 14.0% 4.8% 25.4% 22.4%

Net Profit Margin 12.9% 12.0% 8.2% 3.8% 19.2% 16.8%

Return on Assets 24.3% 6.9% 5.9% 8.2% 5.4% 7.8%

Return on Equity 35.9% 30.9% 9.0% 83.8% 8.8% 21.9%

Over time SAM has maintained a gross margin of about 50% to 55%, the largest among its peers.

Its EBIT margin has experienced a great rise since 2008 and now is at a comfortable 20.1%, above

the peer average. The margin lead shrinks when we get to the net profit margin, which is in line

with its peers. This must mean that SAM pays too much in taxes, since it has negligible interest

expenses. The bottom line is not bad and has improved a lot since 2008, but it should be better

considering the other two margins.

The returns on assets and equity are where SAM shows its strength. The Company knows how to

make the best use of its assets, earning a return from them that is three and a half times as large as

that of the peer group. The return on equity is second only to that of Mendocino, and still a full

five percent over the peer average.

The return on equity is discussed in detail in the next section, DuPont Analysis.



DuPont Analysis – Excellent

2007 2008 2009 2010 2011

Net Profit Margin 6.59% 2.01% 7.49% 10.80% 12.87%

Total Asset Turnover 1.73 1.81 1.58 1.79 1.89

Equity Multiplier 1.48 1.57 1.52 1.56 1.48

Return on Equity 16.84% 5.71% 17.97% 30.25% 35.87%


Net Profit Margin 12.87% 12.03% 8.25% 3.85% 19.23% 16.79%

Total Asset Turnover 1.89 0.90 0.72 2.13 0.28 0.46

Equity Multiplier 1.48 4.04 1.52 10.21 1.62 2.81

Return on Equity 35.87% 30.89% 9.04% 83.77% 8.81% 21.93%

Historically, SAM has increased its return on equity six times, from 5.71% in 2008 to 35.87% last

year.

The primary driver for this increase has been the net profit margin, with the improving total asset

turnover being a secondary factor. The equity multiplier has shown no real movement in the past

five years. When we look at the competitors’ return on equity breakdown we see that although

some other companies are much more highly leveraged than SAM, they do not necessarily

produce a higher return on equity. The only one that does produce a higher return is MENB with

an equity multiplier of 10.21, which along with a total asset turnover comparable to SAM’s more

than compensates for its dismal net profit margin. In the long term, financial stability and

consistent higher margins are rewarded and excessive borrowing is not, so the 83.77% return on

equity does not mean that MENB is a better investment than SAM.

We expect the return on equity to continue improving, with the Freshest Beer Program reducing

the inventory held and thus pushing the total asset turnover even higher.



Market-Based Valuations

Price-to-Earnings

Historical P/E Multiples

2007 2008 2009 2010 2011 Average

SAM 27.17 68.62 14.93 16.84 26.42 30.79

BREW -60.6 -0.5 48.1 74.1 11.8 14.58

MENB -10 -10 -2.5 -2.2 16.2 -1.70

TAP 18.2 22.6 11.5 14.1 12 15.68

STZ 18.5 -4.2 -12.2 21 5.9 5.80

P/E Multiple 26.42 31.00

EPS $ 3.50 $ 4.48

Price per share 92.44 138.88

Probability 0.3 0.7

Weighted Price per share $ 124.95

Current Price $ 104.34

Margin of Safety 19.7%

Boston Beer Company has had a high P/E ratio for the last five years, with the highest level being

in 2008, after which the ratio returned to the market average for a year, and then started rising back

up. Per the most recent data, the market loves SAM and pays over $26 for every dollar of its

earnings. This is $10 more than its closest peer, MENB.

For the 2012 P/E Valuation, we assumed that the market is going to continue paying top dollar for

SAM’s earnings and that the P/E is going to increase, as it has done in the last three years. For our

pessimistic scenario P/E we used the 2011 value, while for the most likely we increased the same

value to 31x, which is still under the 35.87% return on equity that the Company has experienced in

2011. We also used the pro forma earnings per share for each corresponding scenario.

The target price we received is slightly above the current price, giving potential investors a 19.7%

discount.



Price-to-Book

Historical P/B Multiples

2007 2008 2009 2010 2011 Average

SAM 4.57 3.96 2.68 5.10 6.57 4.58

BREW 0.9 0.3 0.5 1.5 1.1 0.86

MENB - 0.8 1.2 2.2 2.1 1.58

TAP 1.3 1.3 1.2 1.2 1 1.20

STZ 1.5 1.5 1.3 1.7 1.6 1.52

2012 P/B Valuation

P/B Multiple 6.57 7.07

Book Value per share $ 17.80 $ 18.78


Probability 0.3 0.7




Historically, the price-to-book ratio has been declining until 2009, after which it doubled in 2010

and reached a new high in 2011. The market again has high expectations for SAM and last year

paid $6.57 for every dollar of its stockholders’ equity, giving it a multiple three times as large as the

second highest one (MENB).

For our pessimistic 2012 P/B Valuation, we assumed that the P/B is going to stay the same and

multiplied it by the book value per share derived from plugging in our pessimistic scenario

earnings into the pro forma balance sheet. For our most likely valuation, we increased the P/B

multiple by 0.50 to 7.07x and multiplied it by the shareholders’ equity per share in the most likely

case. Please note that neither book value per share corresponds to the actual book value per share

in our pro forma balance sheet because the balance sheet equity was calculated using a 30%/70%

weighted average of our two pro forma income statement scenarios.

The Price per Book valuation gave us a margin of safety of 22.7%.



Price-to-Sales

Historical P/S Multiples

2007 2008 2009 2010 2011 Average

SAM 1.61 1.23 1.02 1.67 2.17 1.54

BREW 1.4 0.2 0.3 1 0.8 0.74

MENB 0.1 0.1 0.1 0.1 0.1 0.10

TAP 1.5 1.9 2.8 2.9 2.3 2.28

STZ 1.3 0.8 0.9 1.4 1.3 1.14

2012 P/S Valuation

P/S Multiple 2.17 2.67

Sales per share $ 47.31 $ 49.07


Probability 0.3 0.7




In the last five years, the price-to-sales ratio has been relatively low, with the above described

historical trends in P/E and P/B reflected here as well. SAM’s P/S reached a high of 2.17 in 2011,

which was the second highest of its competitors, behind TAP.

For our pessimistic 2012 P/S Valuation, we used the 2011 P/S multiple and the sales per share

from the pessimistic pro forma income statement scenario. We assumed that investors would once

again recognize the potential of the stock and be willing to pay a premium for every dollar of its

sales. For our most likely valuation, we increased the 2011 P/S multiple by 0.50 and multiplied it

by the most likely pro forma sales per share.

This valuation gave us a margin of safety of 17.4%, which is slightly below the margins we have with

the other two price multiples.



Enterprise Value-to-EBITDA

Historical EV/EBITDA Multiples

2007 2008 2009 2010 2011 Average

SAM 12.21 20.55 5.66 8.04 11.34 11.56

BREW -3.55 -1.02 2.56 2.41 0.99 0.28

MENB 10.64 11.41 8.64 8.58 8.67 9.59

TAP 10.67 -41.35 40.81 15.25 11.38 7.35

STZ 12.21 20.55 5.66 8.04 11.34 11.56

We included $50 million credit facility as debt to be on the conservative side, although none of it

was outstanding at year end.

Boston Beer Company’s EV/EBITDA multiple reached a high point of 20.55 in 2008 and since

then has fallen to half that level. SAM’s multiple is the same as that of STZ, and the two of them

are the largest in the peer group. BREW has a multiple that is ten times smaller than theirs, and no

information could be found about MENB.

For our 2012 EV/EBITDA Valuation, we used the pessimistic EBIT and the 2011 multiple for

the pessimistic scenario. For the most likely scenario, we used the most likely EBIT and we

increased the 2011 multiple by 3, in accordance with the historical trend since 2009. After arriving

at the projected market cap for each scenario by subtracting the maximum debt and adding the

cash available from our pro forma balance sheet, we divided by the anticipated number of shares

after the buyback and weighed both scenarios 30%/70%. This gave us a positive 10.4% margin of

safety.

2012 EV/EBITDA Valuation (Dollar amounts are in Thousands)

Pessimistic Most Likely

EBIT $ 72,854 $ 92,790

Plus Depreciation and

Amortization

$ 19,000 $ 19,000

EBITDA $ 91,854 $ 111,790

Times EV/EBITDA Multiple 11.34 14.34

Enterprise Value $ 1,041,624 $ 1,603,069

Minus Debt $ 50,000 $ 50,000

Plus Cash $ 65,580 $ 65,580

Market Capitalization $ 1,097,201 $ 1,618,649

Number of shares outstanding 12,590 12,590

Price per share $ 83.97 $ 128.57

Probability 0.3 0.7

Weighted Price $ 115.19





Discounted Cash Flow Model

2011 Variable Justification

Current FCFF 48,816 2011 Free Cash Flow to the Firm

Outstanding shares 12,590 Shares outstanding after the planned $21 million buyback

Equity Beta 0.85 Google Finance

Risk-free rate 2.25% 10-year Treasury rate from March 23, 2012

Equity Risk Premium 6.00% Estimate

Cost of Debt 3.25% Interest rate of SAM’s revolving line of credit

Cost of Equity 7.35% Result of above variables in CAPM

Marginal Tax Rate 38% Management estimate for 2012

Equity 0.678 Proportion of stockholder’s equity in assets

Debt 0.322 Proportion of liabilities in assets

LT Debt 50,000 Maximum amount of revolving credit line

WACC 5.63% Result of weighted equity and debt costs

2007 2008 2009 2010 2011 2012 2013 2014

TR 380,575 449,554 453,446 505,870 558,282 611,153 672,268 739,495

10% 10%

FCFF 5,134.9 -152,661 82,609 39,517 48,816 18,282 65,762 72,338

EBIT 36,885 14,062 54,271 81,178 83,575 86,809 112,941 124,235

16.8% 16.8% 16.8%

Tax rate 0.46 0.489 0.428 0.382 0.362 0.38 0.38 0.38

Depreciation 6,654 12,503 16,919 17,427 18,792 22,629 22,629 24,892

2% 3% 4% 3% 3% 3% 3% 3%

CapEx 37,109 104,488 16,989 13,588 20,000 50,000 20,168 22,185

10% 23% 4% 3% 4% 3% 3%

NWC -15,672 67,862 -51,636 14,490 3,297 6,112 6,723 7,395

-4% 15% -11% 3% 1% 1% 1% 1%

2015 2016 2017 2018 2019 2020 2021 2012

TR 813,444 886,654 957,587 1,024,618 1,086,095 1,140,400 1,186,016 TV

10% 9% 8% 7% 6% 5% 4%

FCFF 79,571 63,333 93,672 100,229 106,242 95,766 116,017 2,107,902

EBIT 136,659 148,958 160,875 172,136 182,464 191,587 199,251

16.8% 16.8% 16.8% 16.8% 16.8% 16.8% 16.8%

Tax rate 0.38 0.38 0.38 0.38 0.38 0.38 0.38

Depreciation 27,381 29,845 32,233 34,489 36,558 38,386 39,922

3% 3% 3% 3% 3% 3% 3%

CapEx 24,403 50,000 28,728 30,739 32,583 50,000 35,580

3% 3% 3% 3% 3%

NWC 8,134 8,867 9,576 10,246 10,861 11,404 11,860

1% 1% 1% 1% 1% 1% 1%



For the discounted cash flow model we projected the EBIT as a percentage of revenues. Historical average revenue growth for the last

four years has been 10%, which we assumed can be sustained only through 2015, after which it will slowly deteriorate to a more

sustainable 4%, to be reached in 2021. 2012 data is taken from our pro forma income statement. EBIT margin has been an average of

13% since 2007, but if we exclude the dismal 2008 results and the distant 2007 margin, the average for the last three years is 16.8%,

which we projected through 2021. We kept the tax rate constant at 38% and the depreciation at its historical percentage of revenues

(3%). We assumed that capital expenditures will be 3% of revenues as well, except for every four years, when investment in new

production facilities will be necessary. The change in net working capital was hard to predict, since in the past few years its relationship to

revenues has been very volatile, so we just kept it at a constant 1% of sales.

We discounted our annual cash flows by the weighted-average cost of capital and after adding up the maximum debt we came up with a

value of the Company, which per share is 32.4% higher than the current one.

SAM 2012P 2013P 2014P 2015P 2016P 2017P 2018P 2019P 2020P 2021 TV

FCFF 18,282

65,762

72,338 79,571 63,333 93,672 100,229 106,242 95,766 116,017 2,060,174

Discount Rate 1.056 1.116 1.179 1.245 1.315 1.389 1.467 1.550 1.637 1.730 1.730

Discounted FCFF 17,307 58,937 61,374 63,912 48,157 67,429 68,303 68,541 58,489 67,079 1,191,170

Total FCFF 1,770,700

Long-term Debt 50,000

Total Value 1,720,700

# Shares 12,590

Value per share 136.67

Price 104.34




Three-stage H-Model DCF Valuation

2012 2013 2014 2015 V3

FCFF Growth rate 10.00% 10.00% 10.00%

FCFF $ 48,282,000 $ 53,110,200 $ 58,421,22 $ 64,263,342 $ 1,340,462,348

WACC 5.63% 5.63% 5.63% 5.63% 5.63%

Number of periods 1 2 3 3

PV of CF's $ 50,279,467 $ 52,359,569 $ 54,525,727 $ 1,340,223,181

Part 1: ($ 64,263,342.00*4%)/0.0563-0.04)= $ 157,701,452.80

Part 2: ($ 64,263,342.00*5*0.1124-0.04)/(0.0563-0.04)= $ 1,182,760,895.71

V3: Part1+Part2 = $ 1,340,462,348.47

EV( PV of CF's + PV of V3) $ 1,497,387,943

(-)Total Debt/Total liabilities $ 87,743,000

(+)Cash $ 49,450,000

Market cap = EV+TD-Cash $ 1,459,094,943

Shares outstanding (9,288,015+4,107,355) $ 12,590,000

Target Price $ 115.89


MOS 11.0%

Assumptions:

Short-term growth rate: We used the short term historic revenue growth rate of 10%.

Long-Term Growth rate: We used the same percentage as our spreadsheet calculation, 4%,

for our projected steady-state perpetual growth rate.

Length of Period of Declining Growth: We assumed that would take 10 additional years

after 2015 before SAM would enter its steady-state mature growth stage.

WACC: We used the average WACC located within the EVA calculation for 2011.

For our H-Model DCF valuation, we added the total present values of the forecasted yearly cash

flows with the present value of our projected terminal value to arrive at the forecasted enterprise

value of $ 1,497,387,943.26. We then deducted our current total debt and added back current

levels of cash in order to arrive at the market cap. Finally, we divided this figure by the number of

shares outstanding to arrive at our estimated intrinsic value for SAM’s stock.



Residual Income Valuation:

This valuation shares the idea of the Economic Value Added that only after we subtract the cost of

both equity and debt capital can we see the true value that the Company has added, or if we look at

the income statement, the true income that is freely available to the Company. Since the income

statement already subtracts the cost of debt, we forecasted the earnings per share through 2021 and

subtracted the 7.35% cost of equity. For 2012, we accounted for the fact that the Company will pay

a dividend of sorts, with the $1.67 decreasing the residual earnings.

The main driver of this model is the return on equity, which in 2011 was 35.87%. Since this is a

very high return, we assumed that it could not be kept up for longer periods of time, but will rather

deteriorate. We factored this is in with a decrease in ROE of two percentage points for every year

until we reached 20% in 2020. In 2021, we factored in a sharp drop to a sustainable long-term rate

of 15%, which is still below SAM’s 21.3% five-year average, which we used to estimate the terminal

value of the Company (all amounts are in dollar per share.

Because we are using the return on the book value per share, the projected earnings for 2012 of

$5.29 are different from our weighted pro forma earnings of $4.19. The two amounts can be

reconciled by adding other comprehensive income to the pro forma earnings, such as $1.30 from

sale of stock options and subtracting $0.20 for pension plan contributions.

We can also arrive at the 2012 book value in two ways:

1. Start with 2011 Equity divided by the number of shares after the buyback

($184,745/12590=$14.67)

Add 2012 EPS of $4.19

Add 2012 projected increase in equity due to redemption of stock options, $1.30

Subtract 2012 projected decrease in equity due to pension plan contributions, $0.20

Subtract 2012 planned share buyback of $21 million worth of stock, $1.67

Result: $18.29

2. Start with 2011 Equity divided by the number of shares after the buyback

($184,745/12590=$14.67)

Add the product of the projected 2012 return on equity of 35.87% and the 2011 book

value of $14.67 to arrive at the projected earnings

Subtract dividends paid out by the Company of $1.67/share

Result: $18.26

The two values differ only because of rounding of the estimates, otherwise they both

represent the new book value per share for 2012.



We see that the overall discounted book value of the Company will be $119.14 per share,

14% higher than its current price.

We gave long-term valuations twice the weight of the market-based valuations because they

better express the intrinsic value of the Company over time and account for SAM’s potential

for growth.

Therefore, after weighing all valuations with appropriate weights, we calculated a margin of

safely of 18% for The Boston Beer Company.

Year Projected

Earnings

Dividend Book Forecasted

ROE

KE Equity

Charge

Residual

Income

PV of RI

2011 $ 14.67 $ 14.67

2012 $ 5.26 $ 1.67 $ 18.26 35.87% 7.35% $ 1.34 $ 3.92 $ 3.65

2013 $ 6.21 $ 24.47 34.00% 7.35% $ 1.80 $ 4.41 $ 3.83

2014 $ 7.83 $ 32.31 32.00% 7.35% $ 2.37 $ 5.46 $ 4.41

2015 $ 9.69 $ 42.00 30.00% 7.35% $ 3.09 $ 6.60 $ 4.97

2016 $ 11.76 $ 53.75 28.00% 7.35% $ 3.95 $ 7.81 $ 5.48

2017 $ 13.98 $ 67.73 26.00% 7.35% $ 4.98 $ 9.00 $ 5.88

2018 $ 16.26 $ 83.99 24.00% 7.35% $ 6.17 $ 10.08 $ 6.14

2019 $ 18.48 $ 102.47 22.00% 7.35% $ 7.53 $ 10.95 $ 6.21

2020 $ 20.49 $ 122.96 20.00% 7.35% $ 9.04 $ 11.46 $ 6.05

2021 $ 18.44 $ 141.40 15.00% 7.35% $ 10.39 $ 8.05 $ 3.96

TV 7.35% $ 109.53 $ 53.89

Target Price

$ 119.14

Actual Price

$ 104.34


P/E P/B P/S EV/EBITDA DCF Stylized Residual

Income

Target Price 124.95 128.03 122.54 115.19 136.67 115.89 119.14

Weight 0.1 0.1 0.1 0.1 0.2 0.2 0.2

Weighted Target Price 123.41

Current Price

(March 29 Close)

104.34




Conclusion: BUY 1,000 shares at $104.34

The Company pioneered the “Freshest Beer Program” to make its operations more efficient,

with the added upside of increased revenue over the years.

Maintains a competitive edge in front of its competitors with Alchemy and Science, which is

the Company’s R&D subsidiary. It aims to expand the flavors and techniques of their beer to

come up with innovative beers.

SAM is the largest microbrewer in the U.S., which gives the Company the ability to dictate

pricing within this sub-industry.

The Company has contracted its beer to be produced in other nations, most notably

Germany, which increases profitability of the firm and diversifies risk.

SAM is entering into markets other than beer such as the wines & spirits markets with the

introduction of Twisted Tea and ciders. This strategy will not only diversify risk, but also

enable the Company to penetrate market segments which cover a more diverse group of

customers.

Excellent financial performance over the years compared to its peers. The Company operates

with low amounts of debt and high levels of cash.

SAM is an undervalued stock with respect to all seven valuation methods performed.



APPENDIX 1

The Boston Beer Company C-Suite:

Martin F. Roper – President and CEO

Mr. Roper was appointed as the CEO in January 2001, following C. James Koch, who founded the

Company in 1984. Mr. Roper has been rendering services as the President since 1999, after having

served as the COO since 1997.

William F. Urich – CFO and Treasurer

Mr. Urich was appointed as the CFO and Treasurer of the Company in September 2003. Prior to

joining the Company, Mr. Urich was the CFO of Acirca, Inc., producer of organic foods and

beverages and served as the Vice President Finance and Business Development for United

Distillers & Vintners from 1995-1998.

John C. Geist – Vice President of Sales

Mr. Geist joined the Company in 1997 from a large alcohol beverage distributor, where he

rendered services as a sales manager. He was appointed as the Vice President of Sales in February

2007, after having served as National Sales Manager of the Company since 1998.

Robert P. Pagano – Vice President of Brand Development

Mr. Pagano is a recent addition to the Company where he joined SAM in 2011. Prior to this

appointment, he was served as Managing Director of the brand strategy firm, Red Sky Insights,

LLC. He was the co-founder of the advertising firm, Pagano Scheck & Kay, Inc., Located in

Boston, Massachusetts.



APPENDIX 2

A partial list of SAM’s awards according to “Beer Me” web site:

Samuel Adams Black Lager

Awards:

o Silver Medal, 2010 US Open Beer Championship

o The Americas Best Lager - Dark, 2010 World Beer Awards

o Silver Medal, 2006 Los Angeles County Fair Competition

o Gold Medal, 2006 North American Beer Awards

o Silver Medal, 2005 International Beer Competition

Samuel Adams Boston Lager

Awards:

o Bronze Medal, 2011 Stockholm Beer Festival

o World’s Best Lager - Standard, 2010 World Beer Awards

o Third Place, 2007 San Diego County Fair


o Bronze Medal, 2005 International Beer Competition

o Third Place, Best of the Fest, 2005 Orlando Beer Festival


Samuel Adams Chocolate Bock

Awards:

o Bronze Medal, 2011 Great American Beer Festival

o Silver Medal, 2005 International Beer Competition

Samuel Adams Double Bock

Awards:

o Silver Medal, 2009 Great American Beer Festival

o First Place, 2007 San Diego County Fair


o Silver Medal, 2006 North American Beer Awards

o Gold Medal, 2005 Great American Beer Festival

Samuel Adams Hefeweizen

Awards:

o The Americas Best Wheat Beer - Grain-only, 2010 World Beer Awards

o Gold Medal, 2006 Los Angeles County Fair Competition

Samuel Adams Octoberfest

Awards:

o Bronze Medal, 2011 Great American Beer Festival

o Bronze Medal, 2011 Stockholm Beer Festival

o Gold Medal, 2006 Great American Beer Festival


o Silver Medal, 2006 North American Beer Awards

Samuel Adams Summer Ale

Awards:

o Bronze Medal, 2010 US Open Beer Championship


o Bronze Medal, 2006 North American Beer Awards

http://www.usopenbeer.com/

http://www.tastingbeers.com/

http://www.calferm.org/faircomp/

http://www.northamericanbrewers.org/BeerAwards.htm

http://www.ibc-awards.com/

http://www.stockholmbeer.se/


http://www.sdfair.com/



http://www.orlandobeerfestival.com/


http://www.beertown.org/events/gabf/index.htm



http://www.sdfair.com/







http://www.stockholmbeer.se/




http://www.usopenbeer.com/





APPENDIX 3

Questions for Investor Relations that were never answered:

1) Is Boston Beer planning any acquisitions in the near future? How is the company going to

grow?

2) What is the company planning to do with all the cash on its balance sheet?

3) Does the company plan on taking on any long-term debt?

4) Will the company seek to expand its non-core activity, e.g. brewing and packaging for

other companies?

5) How is the company prepared to counteract the rising costs of inputs (barley and hops)?

6) What quantifiable benefits do you expect from the full implementation of the Freshest

Beer Program?

7) Could you elaborate on the company’s unique position as the largest microbrewer, and

one of very few publicly-traded ones? Do you think that as the company grows, it will fit in

less with its microbrewery image?

8) What is your advantage over larger beer companies who have made acquisitions in the

Better Beer category?

We sent an e-mail with these questions and received no response.

We attempted a phone call and did not receive an answer.



APPENDIX 4

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

December 31,

2011 December 25,

2010 ASSETS

Current Assets:

Cash and cash equivalents $ 49,450 $ 48,969

Accounts receivable, net of allowance for doubtful accounts of $66 and $121

as of December 31, 2011 and December 25, 2010, respectively 23,233 20,017 Inventories 34,072 26,614 Prepaid expenses and other assets 14,605 12,756 Deferred income taxes 4,363 3,648

Total current assets 125,723 112,004 Property, plant and equipment, net 143,586 142,889 Other assets 1,802 2,260 Goodwill 1,377 1,377

Total assets $ 272,488 $ 258,530

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable $ 18,806 $ 19,423

Accrued expenses and other current liabilities 48,243 52,776

Total current liabilities 67,049 72,199 Deferred income taxes 17,349 17,087 Other liabilities 3,345 3,656

Total liabilities 87,743 92,942 Commitments and Contingencies

Stockholders’ Equity:

Class A Common Stock, $.01 par value; 22,700,000 shares authorized;

8,714,931 and 9,288,015 shares issued and outstanding as of December 31,

2011 and December 25, 2010, respectively 87 93 Class B Common Stock, $.01 par value; 4,200,000 shares authorized;

4,107,355 shares issued and outstanding 41 41 Additional paid-in capital 138,336 122,016 Accumulated other comprehensive loss, net of tax (838 ) (438 ) Retained earnings 47,119 43,876

Total stockholders’ equity 184,745 165,588

Total liabilities and stockholders’ equity $ 272,488 $ 258,530



APPENDIX 5


CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)

Year Ended

December 31,

2011 (53 weeks)

December 25,

2010

December 26,

2009

Revenue $ 558,282 $ 505,870 $ 453,446 Less excise taxes 45,282 42,072 38,393

Net revenue 513,000 463,798 415,053 Cost of goods sold 228,433 207,471 201,235

Gross profit 284,567 256,327 213,818 Operating expenses:

Advertising, promotional and selling expenses 157,261 135,737 121,560 General and administrative expenses 43,485 39,112 36,938 Impairment of long-lived assets 666 300 1,049 Settlement proceeds (20,500 ) — —

Total operating expenses 180,912 175,149 159,547

Operating income 103,655 81,178 54,271 Other (expense) income, net:

Interest income 54 79 112 Other (expense) income, net (209 ) (149 ) (16 )

Total other (expense) income, net (155 ) (70 ) 96

Income before provision for income taxes 103,500 81,108 54,367 Provision for income taxes 37,441 30,966 23,249

Net income $ 66,059 $ 50,142 $ 31,118

Net income per common share — basic $ 5.08 $ 3.67 $ 2.21

Net income per common share — diluted $ 4.81 $ 3.52 $ 2.17

Weighted-average number of common shares — basic 13,012 13,660 14,059

Weighted-average number of common shares — diluted 13,741 14,228 14,356



APPENDIX 6


CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

Year Ended

December 31,

2011 (53 weeks)

December 25,

2010 December 26,

2009 Cash flows provided by operating activities:

Net income $ 66,059 $ 50,142 $ 31,118 Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization 18,792 17,427 16,919

Impairment of long-lived assets 666 300 1,049 Loss on disposal of property, plant and equipment 118 64 25 Bad debt (recovery) expense (55 ) (15 ) 24 Stock-based compensation expense 6,178 3,124 4,106 Excess tax benefit from stock-based compensation

arrangements (5,346 ) (3,014 ) (1,640 ) Deferred income taxes (453 ) 4,425 2,131 Changes in operating assets and liabilities:

Accounts receivable (3,161 ) (2,146 ) 177 Inventories (7,458 ) (1,056 ) (2,850 ) Prepaid expenses and other assets (2,146 ) (3,950 ) 6,483 Accounts payable (617 ) (5,832 ) 5,052 Accrued expenses and other current liabilities 894 7,340 3,398 Other liabilities (711 ) 1,021 (427 )

Net cash provided by operating activities 72,760 67,830 65,565

Cash flows used in investing activities:

Purchases of property, plant and equipment (19,599 ) (13,608 ) (16,997 )

Proceeds from disposal of property, plant and equipment — 20 8

Net cash used in investing activities (19,599 ) (13,588 ) (16,989 )

Cash flows used in financing activities:

Repurchase of Class A Common Stock (62,824 ) (67,981 ) (7,080 )

Proceeds from exercise of stock options 4,107 3,661 2,806 Excess tax benefit from stock-based compensation

arrangements 5,346 3,014 1,640 Net proceeds from sale of investment shares 691 552 465

Net cash used in financing activities (52,680 ) (60,754 ) (2,169 )

Change in cash and cash equivalents 481 (6,512 ) 46,407 Cash and cash equivalents at beginning of year 48,969 55,481 9,074

Cash equivalents at end of year $ 49,450 $ 48,969 $ 55,481

Supplemental disclosure of cash flow information:

Income taxes paid $ 40,556 $ 24,769 $ 18,193

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