Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Liana Tamakloe [liana-tamakloe@uiowa.edu]

Boston Beer Company (SAM) November 6, 2015

Consumer Staples – Food, Beverages & Tobacco Stock Rating Buy

Investment Thesis Target Price $218 - $220

Boston Beer Company is a large craft beer manufacturer that has been successfully innovative in marketing new flavorful brands of beer to the market. With a strong industry performance and expected growth in of 13.5% in 2015, and an annual 5.5% growth till 2020, a well-run company like Boston Beer is set to reap the advantages of being in this market, this leading us to a buy conclusion with about 9% upside potential.

Drivers of Thesis

The craft beer industry grew on average 18.8% in the last five years. With revenue growth forecast at 13.5%, and with the industry having already achieved volume growth of 16% by half year 2015, there is more expansion potential for companies operating in this space.

Consumer tastes and preference for flavorful beers has driven industry growth whiles this trend was fueled by the younger population of under 50years. As this age group grows and continues to acquire more global palates, the demand for new innovative beer flavors will grow.

Boston beer is a well-run organization with no debt on its balance sheet, yet generating returns of about 25% on invested capital, a performance above its peers in the industry. With the potential to take on leverage, SAM can generate even more returns on capital in the future.

Risks to Thesis

In Q3 this year, the company experienced declines in sales of its flagship craft beer brand, Samuel Adams®. If this trend persists, revenue growth will be hindered.

The entire beer industry is seeing subtle but persistent competition from spirits and wines beverages. If this trend accelerates, the growth potential of the industry will be negatively impacted.

Henry Fund DCF $203.86 Henry Fund DDM $175.84 Rel. Multiple (US stocks) $194.01 Rel. Multiple (Non- US stocks) $224.94 Price Data Current Price $201.90 52wk Range $195.04 – 325.00 Consensus 1yr Target $244.57 Key Statistics Market Cap (B) $2.63 Shares Outstanding (M) $13.02 Institutional Ownership 87% Beta 0.78 Dividend Yield N/A Est. 5yr Growth 23.61% Price/Earnings (TTM) 29.00 Price/Earnings (FY1) 23.17 Price/Sales (TTM) 2.92 Price/Book (mrq) 6.04 Profitability Operating Margin 16.23% Profit Margin 16.12% Return on Assets (TTM) 17.30% Return on Equity (TTM) 24.58%

Earnings Estimates

Year 2012 2013 2014 2015E 2016E 2017E

EPS $4.60 $5.47 $6.96 $8.32 $8.71 $9.09

growth -9.45% 18.91% 27.24% 19.55% 4.71% 4.39%

12 Month Performance Company Description

Boston Beer Company (SAM) is a Massachusetts based manufacturer of craft beer, flavored malt beverages (FMBs) and hard ciders under the brand names Samuel Adams®, Twisted Tea® and Angry Orchid®. SAM sold 4.1m barrels of beverage in 2014, qualifying it to be a craft brewer as it did not exceed the 6m barrels limit. Headquartered in Boston, the company owns breweries in 5 states (MA, OH, PA, CA, FL) and has a subsidiary beer incubator, Alchemy & Science® headquartered in Burlington, Vermont.

29.0

24.6

14.5

19.421.5

13.7

19.1

25.2

11.8

0

10

20

30

40

P/E ROE EV/EBITDA

SAM Industry Sector

-25%

-15%

-5%

5%

15%

25%

N D J F M A M J J A S O

SAM S&P 500

Source: Factset

Source: Yahoo Finance

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EXECUTIVE SUMMARY

Boston Beer started operations in the mid-1980s following a time when breweries and alcohol production had been outlawed during the Prohibition period. Large brewers emerged in this time brewing light, less flavorful beers to be able to meet demands in the market and to cut costs. Craft beer production emerged from this, where brewers used richer, more concentrated ingredients for better quality and better tasting beers. Over the years, consumers have developed a taste for these more flavorful options to beers. In the last five years, revenue for the craft beer industry has grown at an average 18.5% per year whiles revenues for the entire beer industry altogether has seen steady declines. At half year of 2015 alone, production volume growth for the craft beer industry was at 16%, showing signs for more growth potential.

Boston beer has been very successful in constantly introducing new flavors of beers into their portfolio. Also, the company runs a tight ship, generating income and returns of about 25% on capital invested and for shareholders, without taking on any debt. If management alters the capital structure with the inclusion of leverage, it will be able to generate more value for its shareholders. Taking all these factors into consideration, we modeled revenue growth of about 6% and Eps growth of approximately 20% for 2015. Finally, our calculations lead us to a target price of $220 on the high end, generating an upside potential of about 9%, thus informing our buy recommendation on the stock.

COMPANY DESCRIPTION

SAM has its roots going back to Boston, MA in 1984 when James Koch (current board chairman) started the company by experimenting with a family lager recipe out of his kitchen. The company first made its public debut in 1985, and was quickly accepted by consumers, earning it an award as “The Best Beer in America” through a consumer poll that same year. Over the years, the company grew and in 1995, listed as a public company on the New York Stock Exchange.

SAM manufactures beers, FMBs and hard ciders for a variety of target market consumers under three main brands; Samuel Adams®, Twisted Tea® and Angry Orchid® respectively. In addition, the company owns a beer incubator, Alchemy & Science, which also operates under 4 different brand names: Angel City Brewery®, The

Traveler Beer Co.®, Coney Island® Brewery and the Concrete Beach Brewery™. Irrespective of the different products offered to the market, the company reports its revenues in two segments, ‘Core Brands’ and ‘Non-core Brands’. The core brands include all the products under the brand names of the parent company and its subsidiary listed above. In its non-core brands, the output is made up of product brewed in its Cincinnati Brewery (in Ohio) under a contractual arrangement for a third party. In its 2014 annual report, SAM indicated that sales of such product is insignificant to the company’s total revenue. In light of this, our analyses on SAM focuses entirely on its core brands. Judging from the graph below, production volume of non-core brands have on average have historically remained unchanged, whereas that of core brands have been growing.

Likewise, revenues from the non-core brands stayed the same whereas that of the core brands have been increasing at a CAGR of approximately 14% since 2010 as depicted in the graph below.

-

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014

'00

0 B

arre

ls

Production Volume

Core Brands Non-core Brands

-

200,000

400,000

600,000

800,000

1,000,000

2010 2011 2012 2013 2014

Revenues

Core Brands Non-Core Brands

Source: SAM 10-k

Source: SAM 10-k

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Because of the relatively insignificant proportion revenues from non-core brands make of the company’s total revenues (0.07% of 2014 total revenues), we forecast volume production of this segment to be 14,000 barrels, representing a historical average over the last 5 years. We maintained this output level throughout our forecast period, only growing revenues by 2% being our outlook on long-term inflation plus a premium of 0.4%. Since the company has no stated plans of discontinuing this contractual arrangement, we opted to keep it at this stable level going forward.

Core Brands

SAM is classified as an American craft brewer because it is small, independent and traditional. Being small means the company producers less than 6 million barrels of beer a year, is independent if less than 25% of the company is owned or controlled by an alcoholic beverage industry member (who is also not a craft brewer) and finally traditional because a greater volume of its alcohol beverage production in beers whose flavor is from traditional or innovative brewing ingredients and their fermentation.

This classification is distinct because beer production attracts an excise tax which is in part based on the volume of production, and classification of the operating entity as a craft brewer or otherwise. Flavored malt beverages are not classified as craft beers, but for the purpose of determining the total volume produced for tax purposes, this category is included in the calculations.

Excise Taxes on Beer by States

SAM asserts in its 2014 annual report to be the largest craft brewer in the US. Its products come under the “Better Beer” category of the beer industry. This segment of beers is characterized by craft brewers, specialty domestic brewers, and some imports. By comparison, Better beers are of higher quality in terms of image, color and taste and therefore command higher prices as against regular domestic beers. The Samuel Adams® brand (sometimes labelled Sam Adams®) is one of the largest brands in this beer category, and so is the Angry Orchard® the largest selling hard cider in the US since 2013. Not surprisingly, making the company the largest craft brewer in the country.

The company sold 60 varieties of beers under the Samuel Adams brand, 11 FMBs under the Twisted Tea brand and 10 hard cider selections under the Angry Orchard brand. Throughout the year, the company offers seasonal beers which are available only during certain seasons in a year. For example the Samuel Adams Winter Lager® is available from November to December whereas the Samuel Adams Summer Ale® can be purchased in the months of March

Source: Federal Tax Administration

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through July only. In addition to these seasonal beers, the company produces ‘Limited Editions’ of some varieties of its beers. Examples of these include the Samuel Adams Utopia® and Infinium®. The difference with between these two marketing strategies is that while availability of some beers varies with the seasons of the weather, those of the limited edition are constrained by the volume of output made available on the market. The company believes that consumers have a fast changing taste preference and to remain competitive, it’s necessary to change the flavor of its beers, thereby constantly surprising consumers with a variety of tastes.

Per the SAM estimates, the craft beer industry in the US grew 19% in 2014 whiles the Better beer category grew by 7%. The entire beer industry remained relatively flat during this period. With this background and expectations of craft industry experts estimating the next 5-year CAGR to be 5.5%, we projected volume output to grow by 4.5% in the first three years of our horizon, slowing down to about 1% growth in the final year. With an average price per barrel of $220.46 in 2014, we forecasted an increase in prices of 1.6% representing our CPI inflation rate over the long term. Together, the volume and price forecasts yield a revenue forecast growing at 6% in the first three years, then slowing down to 3.60% in the terminal year of our forecasts.

Company Analysis

Location - SAM owns breweries in 5 states in the US. Besides the Boston Brewery in MA where the company is headquartered, it has operations in Cincinnati OH, Breinigsville PA, Los Angeles CA and Miami FL. Peculiar to its manufacturing locations is that the Ohio brewery is where production of its ‘non-core’ brands takes place as previously indicated. In addition it is from this location that most of the company’s specialty and lower volume products are produced. The Boston plant was the first production site of the company and is now mainly focused on ideating, test brewing and developing new products for the organization’s future use. The Pennsylvania brewery is the largest and together with the Cincinnati brewery produce most of the beer volume. In 2014, 95% of beer shipment were from company owned breweries. The company is into a brewing services agreement with 3 other companies from where the remaining volume are produced. These are City Brewing Company LLC in Latrobe PA and La Crosse WI, Pleasant Valley Wine Company in

Hammodsport NY, and Shmaltz Brewing Company LLC in Clifton Park also in NY.

Production - For its production, SAM sources its main ingredients of hops, yeast and apples from a variety of sources. For its malt, it is sourced from a single supplier with whom there currently exists a multi-year agreement to supply to the company. Even though SAM expresses confidence in this relationship with the supplier, we are very skeptical of the prudence in having all malt supplied from one single source, thus making us a little nervous about the future. For its hops, it has contract arrangements with seven hops dealers for hops produced both in the US and in other international locations. It maintains a two-year inventory of hops to reduce the risk of shortage.

Marketing & Distribution – Distribution is done through a network of 350 independent distributors in the US and a number foreign wholesalers, importers and other agents from global markets. Its product is marketed mainly in the US but also in Canada, Europe, Australia, New Zealand, Israel, Mexico, Central & South America, the Caribbean and the Pacific Rim. There is no indication exactly what percentage of output is sent to these markets but our understanding of the company so far leads us to believe it may be in the region of 10%. In 2014, the single largest distributor accounted for 6% of net revenues, with the top three distributors accounting for 12% of net revenues collectively. The company’s marketing activities is through a sales force 410 who are constantly in the marketing engaging with distributors and retailers about new brands and flavors, and ensuring effective intermediation with the company. Besides the sales force, marketing is also carried through the traditional media outlets like television, radio, print and billboard and other new ones like digital devices and social media. In this regard, all its different brands each have a dedicated website to serve the needs of its market. From knowing what goes into the product, to finding information on availability in specific locations, and again to what pairings of food will make a great meal, these lively websites offer a plethora of information about the brands. With the modern age of social media, the websites offer an opportunity to share photos, and connect with people who share the same interests.

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Sample Web Page of the Samuel Adams Brand

Packaging & Competition - In packaging, the beers are put in kegs if being sold to on-premise retailers, such as restaurants and bars, and in bottles and cans when sold to off-premise retailers like grocery, convenience or liquor stores. Additionally, the company sometimes reintroduces some flavors of brands which have previously been taken off the market, including some of these in its variety pack. The company derives competitive advantage, especially among imported brands of better beers as it does not incur import charges and serves customers with superior fresh products. We believe this will continue to be an advantage as the introduction of the Fresher Beer Program, has reduced distributors’ inventory by about two weeks. This program entails a reorganization of the delivery process around forecasting, planning and general co-operation with distributors to reduce inventory volumes and ensure more fresh products to the final consumer. Against regional breweries, the company has a long history of awards which certify the quality of its products. It also alludes to availability of resources and cost savings from its promotion and distribution functions. With the recent acquisition of 100% of the joint venture Molson Coors had with SABMiller in producing MillerCoors, I believe a competitor like Molson Coors stands to gain access to more resources, thus destroying the advantage SAM projects.

RECENT DEVELOPMENTS

As a mid-sized craft beer manufacturer, does not report many corporate changes of its business model. Being a fairly young company too helps to explain some of the reasons why there is not much to report in terms of corporate developments. Our following discussion focuses on the role of the subsidiary brewery company Alchemy & Science, and the just released Q3 earnings report.

Establishment of Subsidiary

The craft beer industry has witnessed growth in the last few years and to be able to remain relevant and take advantage of some this growth, SAM established its beer incubator Alchemy & Science® (A&S) in 2011, with the mandate to find new opportunities in the industry. As explained by SAM in its 2014 10-K, these opportunities could come in the form of geographic expansion, or may be stylistic, in that it may lead to a change in existing process. For this reason, A&S made purchases of assets of breweries in both 2012 and 2013, from a Los Angeles based brewer and a New York based brewer respectively. The output from A&S trades under a separate brand name from those of the parent company, and in limited markets. The company has been experimenting with ‘shandy-style’ beers and other fruit flavored variations looking to understand trends and changes in taste preference in its consumer market base.

With expectations of continued growth in craft beer demand, many of the larger players have acquired local craft breweries to establish themselves to partake in the expected growth. A&S therefore serves as an effective arm of SAM as it engages in asset acquisitions among others, giving SAM a footing in the niche markets as these gains materialize. We perceive this arrangement to be highly beneficial, as it frees up responsibility for the parent company SAM to concentrate on satisfying and growing the current customer base, and leaving the hunt for growth opportunities to A&S.

Q3 Earnings Released

At the end of the month last October, the company released its Q3 earnings results and even though the company performed better than analyst estimates, the stock took a 9% hit following management’s warning on

Source: SAM Website

Page 6

reducing volumes associated with its Sam Adams brands. The stock has since rebounded on other news of M&A activity affecting other small craft brewers, even though the price gains do not bring it close to pre-earnings release levels.

For revenues in Q3, SAM earned $293.1m representing a growth of 9% over that in 2014, and beating estimates by $5.07m. Increased revenues were attributed to increases in shipment volume (mostly from increased volumes from the Twisted Tea®, Angry Orchard® and some brands manufactured by A&S, Traveler® and Coney Island ®), and increased revenue per barrel impacted by product mix and some increases in prices. Consequently, gross margins came in at 53.6% compared to 53% last year. In addition to increased revenues, lower ingredient costs worked to enhance margins for the quarter.

Other costs such as advertising and general & administrative came in higher than it was in 2014. These increases were attributed to salary expenses, increased promotional spending increased freight to distributors due to higher volumes. All put together, net income for the quarter was $2.85 per share, showing a $0.6 increase over the same period last year, and beating estimates by $0.16.

For FY2015, the company expects an EPS of $7.40, compared to $6.94 in 2014 and a little lower than the initial guidance of between $7.10 and $7.50 previously communicated. Compared to SAM’s forecasts, our estimates for EPS in 2015 is $8.32 whereas average analysts comes in at $7.23. Our forecasts takes into account SAM’s guidance on depletion growth rate estimated to be between 3% and 6%, leading us to forecast volume growth at 4.5% in the first three years of our horizon. Also, taking cognizant of some other factors such as estimated expenditures on advertising and promotions and an effective tax rate of 37%, our forecast more closely represents what management has guided on major items in its financials. We believe the $7.40 estimate of EPS from management is lower than forecast to include a surprise element that will translate into SAM beating analyst projections at announcement of its Q4 and FY15 results.

INDUSTRY TRENDS

The Craft Beer Industry is a sub-category in the beer industry which comes under the broader Food, Beverage

& Tobacco Industry in the Consumer Staples Sector of the S&P 500. Our discussion of industry trends will take two main forms: (a) the decline in popularity of the overall beer industry vis-à-vis the growth in popularity of craft beers, and (b) changing consumer tastes and competition from other alcoholic beverages

Declining Beer sales; growing popularity of Craft Beers

Beer makes up the largest component of the alcoholic beverage industry (47.8%), however in recent years, the volume of beer sold and consumed has been reducing gradually.

Source: Distilled Spirits Council, via Market Realist

Source: Brewers Association, via Market Realist.com

Wine17%

Distilled Spirits35%

Beer48%

ALCOHOLIC BEVERAGE INDUSTRY CLASSIFICATION

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In recent years however, market share for beer has been decreasing gradually, to the benefit of increasing market share for distilled spirits and wines. The reason behind reduction in market share for beer is due to changing consumer preference (we shall explore more on this in the next section) and a shift to consuming healthier options of beverages such as tea and bottled water.

MARKET SHARE TREND OF ALCOHOLIC BEVERAGES

Interestingly however, within the beer category, craft beers have witnessed impressive growth. In 2013, volume sales of craft beers increased 15% and 18% by dollar value. For 2014, volume sales were 22.2m barrels, an increase of 18% for that year. As at the end of the first half of 2015, craft beer production was at 12.2m barrels representing 15% increase over the same period in 2014, and an increase in breweries by 700 since the middle of 2014. According to the Brewers Association, the total brewery count as at writing of this report has surpassed 4,000.

Changing Consumer Preference

As earlier mentioned, one of the underlying factors in the decline in beer sales is shifting tastes and preferences of consumers. These changes in preference can be attributed to increased awareness of health risks associated with alcohol consumption, and more importantly changes in the demographic composition of the consuming market.

Beers sales to the population group aged 50 years and above constitute 30% of total sales in the industry. Implying that the remaining consumption is by those under 50 years but above 21. This population has had a growing preference for light and flavorful beers. There are also signs of shifting preference for other alcoholic products like wine and distilled spirits among this demographic group. These have been as a result of innovative product releases in these categories, as well as competitive price points, drawing away market share from beers.

From our understanding of the industry and observation of current events in the market place, we are of the opinion that we will continue to see consumers develop even more global palates thereby leading to higher demand for more in-depth flavorful alcoholic beverages. In light of this, we expect to see continued growth for craft beers as a result.

MARKETS AND COMPETITION

The beer industry has a unique and intricate classification which goes a long way to segment manufacturers into different groups. Broadly, there are two main classification of the beer industry, craft brewers and non-craft brewers. As previously described, craft brewers are described as small, independent and traditional. All other characteristics that do not fit this description qualifies a brewer as non-craft; that is to say they are large, not independent and may not be brewing traditional beers.

Source: Distilled Spirits Council, via Market Realist.com

Source: Brewers Association, via Market Realist.com

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Further sub-classification of the beer industry is as shown in the figure below.

US Beer Market Classification

As described earlier, craft beers are usually richer in quality, and command a higher price than non-craft beers. It is believed that on average, craft brewers use 3x – 7x more malt in their brewery activities leading to richer flavors. For farmers, this has been an important market source.

Microbreweries produce less than 15,000 barrels of beer a year and sell at least 75% of that output to off-site consumers. Brewpubs produce and sell at least 25% or more of output onsite to consumers. These are usually restaurants and other locations serving beer directly out of the brewery’s storage tank. A contract brewery is a business who hires another to manufacture beer on its behalf. Interestingly, the manufacturing brewery is also described as a contract brewery. The hiring firm may be an ordinary business or another brewery that needs more capacity for manufacture of its products. The producing brewery handles production and packaging, while the hiring firm/brewery handles marketing and distribution of the product. A regional craft brewery like SAM produces more than15,000 barrels of beer per annum, but less than 6m barrels.

Packaging of craft beer has historically been in bottles. In recent times, cans have been introduced as they are lighter and make for easy and cost efficient transportation, are able to block light thereby keeping the beer fresh and are more sustainable and they recycle more easily than bottles.

In 1919, the 18th Amendment of the US Constitution declared it illegal to manufacture, distribute and sell alcohol, a period known as the Prohibition Era. This was due to a number of factors including the belief that alcohol contributed to the problems of society. In 1933, the 21st Amendment of the constitution repealed the earlier provision, but it was about the onset of World War II and so production of beer did not return to pre-prohibition levels quickly. To control the industry therefore, states enacted laws that required three main players in the beer production chain; manufacturers, wholesalers/ distributers and retailers. This was to effect more control over the industry for effective taxation and production volumes through the issue of licenses to all three industry participants. Taxation is done both on a federal and state level where manufacturers pay federal & state excise taxes, and distributors and retailers pay sales. The map below shows the distribution of taxes by state.

State Beer Excise Tax Rates as at Jan. 2015 ($/gal.)

It is estimated that about $48.5bn was collected as tax revenue from breweries, and this amount represents approximately 40% of beer retail price. Taxes were introduced initially to control consumption of alcohol with the belief that higher prices will reduce volume demanded by consumers. Following from this, we see brewery establishments concentrated in areas where state taxes are lower. Also influencing location decisions are population density of the area, availability of high quality water, and areas with warmer temperatures which aid and

Source: Technavio.com

Source: The Tax Foundation

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facilitate higher crop yields. Altogether, we see concentration of establishments on the west coast, the Great Lakes region, the Mid Atlantic and in Colorado and Texas.

Brewery Locations in the US

For organization cost structures, not surprising is the fact that purchases of raw materials make up a majority of costs, approximately 57%. For large manufacturers therefore, global prices of grains and other agricultural produce will have a huge impact on costs and net earnings.

Craft Industry Costs Vs Consumer Staples Sector Costs

To remain competitive, industry players devise incentive programs for distributors to carry more of their products in their portfolio. Companies also fight for shelf space in retail locations to ensure visibility. And to compete for consumers’ attention, beer manufacturers have introduced seasonal and limited edition drinks to their portfolio of products. In 2013, seasonal and other non-customary craft beers contributed about 24% of the industry’s growth. SAM has been very successful in infusing a variety of flavors in its portfolio and has been a point of reference in many publications.

Peer Comparisons

The beverage industry is filled with a good selection of companies listed on formal exchanges as investment opportunities. In the entire universe of alcoholic beverage manufacturers, popular companies like Heineken and SABMiller, who are major players in the US market trade on foreign exchanges and therefore do not represent accurate comparison to SAM. Of the 5 companies shortlisted, only Craft Brew Alliance has a product portfolio made of mostly craft beers and can thus be compared sufficiently. All the other comparable companies have a mixed portfolio of wines, beers and spirits.

In the preceding table SAM is the second largest company by market cap, and generates the most returns to shareholders and the most returns to invested capital. Meanwhile, its net margins of 10% are comparable to its peers even though they have slightly higher margins. With respect to operating margins, it actually performs better that Molson Coors which is a far larger company with a bigger product portfolio. The larger firms like Diageo and Anheuser-Busch have larger operating margins resulting from cost savings due to large volumes. Some of these firms also have very dedicated distribution partners and can leverage on their size to bid against the smaller companies on several levels.

Source: IBIS World, 2015

Debt/Total Assets = %

Source: Factset

Company Ticker

Op.

Margin

Net

Margin

Debt/

Assets ROIC ROE

Craft Brew Al l iance BREW 2.85 1.54 8.33 2.45 2.72

Boston Beer Company SAM 16.43 10.05 0.10 24.55 24.58

Molson Coors Brewing Company TAP 12.06 12.38 22.77 4.66 6.22

Constel lation Brands, Inc. STZ 25.90 13.92 48.42 6.92 15.61

Diageo plc DEO 28.05 22.02 39.14 14.91 31.34

Anheuser-Busch Inbev Sa BUD 29.90 19.58 35.28 9.95 18.37

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Also, SAM has virtually no debt and yet generates more returns to equity holders, whereas all the other companies hold some level of debt in their capital structure. This makes the company more attractive, especially as an acquisition target.

On the valuation metrics, SAM appears fairly richly valued, second only to Craft Brew when looking at P/E. Along the other variables, the stock trades comparatively to its peers (the small and medium cap stocks) and a little above the larger cap stocks. On the other metrics, it trades comparable to the other stocks, with investors willing to pay a little bit more for the company’s cash-flows, as depicted by its slightly higher P/CF multiple.

ECONOMIC OUTLOOK

GDP & Disposable Income

Craft beers is generally priced higher than regular beers. People’s expenditure on ‘pricey’ goods is influenced in part by economic cycles and disposable income. The more economic activity and thus GDP the country generates, the more disposable income consumers will have given that savings habits remain unchanged. This will therefore lead to increased demand for a good like craft beer. The opposite is also true. Given this condition however, we believe the elasticity of demand for craft beers is not extremely sensitive to disposable incomes and GDP unless in times of serious economic recessions. Given that economic performance of the US in recent years, we do not foresee any serious downturn in the markets. In the long run, we predict GDP to rise on average 3.05%. Below are graphs of recent GDP and disposable income statistics for the US.

US 5-year GDP Growth Rate

US 5-year Disposable Personal Income

Unemployment

Closely related to GDP and disposable income is unemployment. When more people have jobs, they have more income and their share of disposable income will increase. This will then lead to increased spending on non-essential items like craft beer. On the other hand, when people do not have jobs, they will spend less on alcohol. It is worth noting here though that people tend to grow almost addicted to alcohol and so unless they have been out of work for very long periods, their employment situation bears little on their alcohol expenditure. We do not anticipate any rapid deterioration in the labor markets and therefore predict unemployment in the long run to stay at about 5.31%.

The US job market has been improving steadily and is currently at very low levels. The graph below depicts the gradual decline in unemployment over the last 5 years.

Source: Factset

Company MKT Cap

EV/

EBITDA P/E P/S P/CF

Craft Brew Al l iance 161 18.73 83.38 1.28 25.74

Boston Beer Company 2,778 20.21 44.21 4.42 28.24

Molson Coors Brewing Company 17,424 20.33 27.00 3.34 10.90

Constel lation Brands, Inc. 27,193 16.82 30.70 4.27 23.89

Diageo plc 72,132 16.95 19.43 4.30 18.21

Anheuser-Busch Inbev Sa 201,600 13.25 20.22 4.04 13.43

Source: Trading Economics

Source: Trading Economics

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5-year Unemployment of the US

Corporate & State Beer Taxes

As discussed earlier, specific tax regimes exist for the beer industry on both a federal and state levels. In 2014, taxes generated revenues of about $48.5bn representing 40% of beer prices. We do not foresee rapid increases in the tax on beer production and sale. However, we may see some slight increases in some states over time.

Commodity Prices

As discussed earlier, raw material purchases constitute a huge chunk of the cost structure for breweries. Commodity prices on global markets have remained soft from much of last year till date. With slowing growth in a lot of international markets, especially China, we do not expect to see strengthening in commodity prices anytime soon. In addition to global input prices, government subsidies and the weather pattern can affect input costs for beer manufacturers. Since these elements are most unpredictable, we do not have specific opinions of what changes will take place in the near future, but we do not envision any sudden government activity, or rapid increases in commodity prices to affect raw materials costs.

INVESTMENT POSITIVES

The craft beer industry has seen strong growth in product volume and value especially in the last couple of years, where volume growth was 15% in 2013 and 18% in 2014. Additionally as at half year in 2015, volume growth was 16%, indicating there is more room for growth in the near future.

While the overall beer industry is experiencing gradual declines in market share, craft beer has been resilient and rather grown its share of the market, spurred on by changing taste and preference for flavorful beers.

SAM is one of the largest craft producers in the industry and well poised to take advantage of the growth opportunities in the market. The company can take on debt as it currently has none to expand its operations and can generate sufficient cash to pay back its debt obligations. It returned positive ROIC and ROE to shareholders at 25%, much higher than its peers with large debt balances on their books.

INVESTMENT NEGATIVES

Forecast declines in the sales of its flagship beer brand, Samuel Adams by management in their Q3 earnings release. If this situation should persist longer, the company may not enjoy in the rise in demand for craft beers as it will be locked out by competition.

With increased competition form wines and spirits, if the declines in beer sales extends to craft beers, the company will take a big hit.

VALUATION

Revenues

Our revenue forecast was broken into the company’s two reporting segments: Core and Non-core Brands.

Volume forecast for the core brands was kept constant at the average historical level over the previous 5 years, while price increased by 2% each year over our forecast horizon. For core brands, volume increases was at 4.5% in the first three years and then reduced to grow at 2.5% from then on, reducing by 5 basis points each year following that until terminal year growth was only 1%. Price increases for this segment was 1.6% each year, reflecting our long term view of inflation at the time. Taken together, revenues growth was 6% in each of the first three years, reducing gradually to 3% by the terminal year.

Costs, etc.

COGS – Our cost of sales was 43% of revenue for each year of our forecast horizon, being the historical average cost of sales to revenue.

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Selling and promotional – We forecast selling cost initially starting at 27% of revenues, going off of the historical trend, more biased to the ratio of promotional spend in 2014. Over the forecast, this cost reduces by an average 7 basis points showing savings to be gained as operational scale expands.

General & Administrative Expenses – This portion of our costs for the first year was in the same ratio of general & administrative costs to revenue in 2014 which was 7.31%. As we progressed in our forecast, this ratio reduced by 0.06% on average throughout.

Margins – Our operating and profit margins forecasts were relatively unchanged over the period, being 18.2% and 11.45% on average respectively.

EPS – our EPS for 2015 was $8.32, increasing steadily to

$10.02 over the forecast years. Management EPS forecast for the year is $7.40 whereas analyst estimates come in at $7.20. We closely modelled our 2015 earnings taking into consideration several of management’s guidance on expected earnings growth of expenditure and investment patterns. We believe the disparity in EPS forecasts for 2015 can be explained by one time arbitrary events which we did not model for the company.

Capex – Our capital expenditure in terms of inventory

was 6% each of forecast revenues reflecting the historical average ratio of this asset item to revenue, whiles capital investments in PPE was on average $80m arrived at after getting a sense of management’s expectations on plant and infrastructure expenditure each year.

WACC – Our wacc for the company came in 6.87%. We

used a risk free rate of 3.09%, being the 30-year treasury yield, an equity market premium of 4.85% being the 87-year average stock returns in excess of the 30-year government treasury and a bond spread of 1.16% being the average for the beverage industry. At a tax rate of 35% and carrying almost no debt on its balance sheet (0.02%), the wacc was almost entirely made up of the cost of equity which was also 6.87%.

Valuation

Our valuation resulted in the following values for our stock price as at year end 2015: DCF – $203.86 DDM - $ 175.84

Relative Valuation (US traded companies) - $194.01 Relative Valuation (non-US traded companies) - $224.94 Our target price is set between $218 - $220 relying mostly on our DCF pricing and relative valuation prices. The company has historically not paid dividends and so the dividends payout used in estimating the price for the DDM was an average of payout ratios from its peer group. At a payout of 45%, this may not be very reflective of the payout policy the organization would have been running had it engaged in a paying dividends.

KEYS TO MONITOR

Going forward, three things that will be influential in our investment thesis are:

a. The trend in preference for craft beers over regular non-craft beer, and the level of competition from other alcoholic beverages like wines and spirits.

b. If management is able to reverse the decline in volumes of the Samuel Adams® brand of beers as this beer carries the main brand value of the company and is central to output.

c. Government regulation and other policies in terms of subsidies, taxes or licenses which may impose severe restrictions on the industry’s potential.

REFERENCES

1. Boston Beer Company Websites and 10-K filings

2. Factset

3. Seeking Alpha http://seekingalpha.com/article/3628926-boston-beers-sam-ceo-martin-roper-on-q3-2015-results-earnings-call-transcript?part=single

4. Brewers’ Association https://www.brewersassociation.org/statistics/craft-brewer-defined/

5. Federal Tax Administration http://www.taxadmin.org/fta/rate/liquor.pdf

6. The Beer Institute

Page 13

http://www.beerinstitute.org/news-media/press-

releases/u.s.-beer-industry-brews-253-billion-in-

economic-activity-and-serves-u

7. Huffington Post http://www.huffingtonpost.com/entry/ab-inbev-sabmiller-merger_561d0d89e4b0c5a1ce607a2f

8. Fortune Website http://fortune.com/2015/08/05/beer-industry-craft-beer/

9. Market Realist http://marketrealist.com/2015/03/alcoholic-beverages-key-category-beverage-industry/

10. Technavio.com http://www.technavio.com/report/beer-market-in-the-us-size-and-growth-forecast-2015-2019

11. The Tax Foundation http://taxfoundation.org/blog/how-high-are-beer-taxes-your-state

12. Wikipedia https://en.wikipedia.org/wiki/Beer_in_the_United_States

13. Beverage Industry.com

http://www.bevindustry.com/articles/87230-craft-brewers-sales-growth-continues

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Page 14

The Boston Beer Company

Key Assumptions of Valuation Model

Ticker Symbol SAM

Current Share Price $201.90

Current Model Date 11/6/2015

Fiscal Year End Dec. 31

Pre-Tax Cost of Debt 4.25%

Beta 0.78

Risk-Free Rate - 30 Year Treasury 3.09%

Equity Risk Premium 4.85%

CV Growth 2.62%

Current Dividend Yield 0.00%

Marginal Tax Rate 35.00%

Effective Tax Rate 37.00%

CPI Inflation Rate 1.60%

Depletion Growth Rate 4.50%

Non-core Brands Price Growth 2.00%

10-year Treasury Rate 2.34%

Cost of Equity 6.87%

WACC 6.87%

Shares outstanding

13,016

The Boston Beer Company

Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Revenue - Core Brands 579,133 738,247 902,343 958,035 1,017,165 1,079,945 1,119,168 1,154,131 1,184,323

Revenue - Non-Core Brands 1,089 806 664 949 967 987 1,007 1,027 1,047

Net Revenue 580,222 739,053 903,007 958,984 1,018,133 1,080,932 1,120,175 1,155,158 1,185,370

Growth 13% 27% 22% 6% 6% 6% 4% 3% 3%

Volume (in 1000 barrels)

Core Brands 2,727 3,403 4,093 4,277 4,470 4,671 4,764 4,836 4,884

10% 25% 20% 4% 5% 4% 2% 1% 1%

Non-core Brands 19 13 10 14 14 14 14 14 14

46% -32% -23% 40% 0% 0% 0% 0% 0%

Total Volume 2746 3416 4103 4291 4484 4685 4778 4850 4898

11% 24% 20% 5% 4% 4% 2% 1% 1%

Price ($ per barrel)

Core Brands 212.37 216.94 220.46 223.99 227.57 231.21 234.91 238.67 242.49

2.47% 2.15% 1.62% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60%

Non-Core Brands 57.32 62.01 66.42 67.75 69.11 70.49 71.90 73.34 74.80

-13% 8% 7% 2% 2% 2% 2% 2% 2%

The Boston Beer Company

Income Statement

Fiscal Years Ending Dec. 31 2012 1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15E 2015E 2016E 2017E 2018E 2019E 2020E

Net revenue 580,222 135,932 181,332 216,414 205,375 739,053 183,845 231,611 269,734 217,817 903,007 199,503 252,204 293,094 214,183 958,984 1,018,133 1,080,932 1,120,175 1,155,158 1,185,370

Cost of goods sold 244,804 68,149 84,200 101,035 100,747 328,228 93,326 108,515 126,738 109,417 402,858 99,888 115,979 136,084 56,687 408,638 433,842 460,601 477,324 492,230 505,104

Depreciation 20,208 25,903 35,138 45,788 49,294 53,578 56,749 58,339 59,738

Gross profit 315,210 67,783 97,132 115,379 104,628 384,922 90,519 123,096 142,996 108,400 465,011 99,615 136,225 157,010 157,496 504,558 534,997 566,752 586,102 604,588 620,528

Operating expenses:

Advertising, promotional & selling expenses 169,306 43,449 50,178 56,096 58,207 207,930 61,257 65,922 65,024 58,493 250,696 60,247 71,370 78,205 49,104 258,926 274,387 291,095 301,327 310,506 318,391

General & administrative expenses 50,171 14,648 14,906 15,744 17,034 62,332 15,871 16,681 15,748 17,671 65,971 17,230 18,036 17,707 16,841 69,814 73,815 78,368 80,877 83,402 85,228

Impairment of long-lived assets 149 - - 1,300 267 1,567 - - 1,577 200 1,777 - - 218 672 890 890 890 890 890 890

Settlement proceeds - - - - - - - - - - - - - - - - - - - - -

Total operating expenses 219,626 58,097 65,084 73,140 75,508 271,829 77,128 82,603 82,349 76,364 318,444 77,477 89,406 96,130 66,617 329,630 349,091 370,352 383,094 394,799 404,509

Operating income 95,584 9,686 32,048 42,239 29,120 113,093 13,391 40,493 60,647 32,036 146,567 22,138 46,819 60,880 90,880 174,928 185,906 196,399 203,009 209,789 216,019

Interest income (expense) 31 (2) (6) 30 9 31 (4) (5) 31 (1) 21 (3) 11 - 13 21 21 21 21 21 21

Other income (expense), net (98) (122) (220) (57) (184) (583) (136) 201 (371) (688) (994) (325) 54 (527) 538 (260) (260) (260) (260) (260) (260)

Total other income (expense), net (67) (124) (226) (27) (175) (552) (140) 196 (340) (689) (973) (328) 65 (527) 551 (239) (239) (239) (239) (239) (239)

Income (loss) before provision for income taxes 95,517 9,562 31,822 42,212 28,945 112,541 13,251 40,689 60,307 31,347 145,594 21,810 46,884 60,353 91,431 174,689 185,667 196,160 202,770 209,550 215,780

Provision (benefit) for income taxes 36,050 2,650 12,107 16,526 10,866 42,149 4,936 15,261 22,381 12,273 54,851 8,067 16,952 21,729 17,887 64,635 68,697 72,579 75,025 77,534 79,839

Net income (loss) 59,467 6,912 19,715 25,686 18,079 70,392 8,315 25,428 37,926 19,074 90,743 13,743 29,932 38,624 73,544 110,054 116,970 123,581 127,745 132,017 135,941

Weighted average shares outstanding - basic 12,928 12,800 12,886 12,843 12,914 12,869 12,992 13,040 13,033 13,064 13,038 13,214 13,363 13,182 13,182 13,227 13,426 13,588 13,761 13,646 13,504

Net income per share - basic 4.60 0.54 1.53 2.00 1.40 5.47 0.64 1.95 2.91 1.46 6.96 1.04 2.24 2.93 5.58 8.32 8.71 9.09 9.28 9.67 10.07

Dividends declared per common share 3.74 3.92 4.09 4.18 4.35 4.53

Total Dividends Paid 0 0 0 0 0 0 0 0 0 0 0 49,524 52,637 55,611 57,485 59,408 61,174

Div. Payout Ratio 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 45% 45% 45% 45% 45% 45%

The Boston Beer Company

Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Current Assets:

Cash & cash equivalents 74,463 49,524 76,402 110,480 130,687 153,316 190,440 214,987 240,908

Accounts receivable, net 31,479 42,001 36,860 43,154 45,816 48,642 50,408 51,982 53,342

Inventories 44,361 56,397 51,307 57,539 61,088 64,856 67,210 69,309 71,122

Prepaid expenses & other assets 6,628 10,644 12,887 12,817 13,608 14,447 14,972 15,439 15,843

Income taxes receivable 1,645 1,038 21,321 - - - - - -

Deferred income taxes 5,411 5,712 8,685 1,770 1,881 1,987 2,054 2,123 2,186

Total current assets 162,342 164,278 207,462 225,760 253,079 283,248 325,084 353,841 383,401

Property, plant & equipment, gross 310,682 409,689 553,979 628,979 713,979 793,979 863,979 933,979 1,003,979

Less accumulated depreciation 120,734 143,131 172,410 218,198 267,492 321,070 377,819 436,159 495,897

Property, plant & equipment, net 189,948 266,558 381,569 410,781 446,487 472,909 486,160 497,820 508,082

Other assets 4,656 9,556 12,447 12,646 12,848 13,054 13,263 13,475 13,691

Goodwill 2,538 3,683 3,683 3,683 3,683 3,683 3,683 3,683 3,683

TOTAL ASSETS 359,484 444,075 605,161 652,870 716,098 772,893 828,189 868,819 908,857

Current Liabilities:

Accounts payable 28,303 34,424 35,576 37,096 39,384 41,813 43,331 44,685 45,853

Current portion of debt & capital lease obligations 62 53 55 50 45 41 37 33 30

Accrued expenses & other current liabilities 60,529 69,900 74,539 79,116 83,996 89,177 92,414 95,301 97,793

Total current liabilities 88,894 104,377 110,170 116,262 123,425 131,031 135,783 140,018 143,677

Deferred income taxes 20,463 32,394 50,717 42,349 45,010 47,554 49,156 50,800 52,310

Debt & capital lease obligations, less current portion 566 584 528 478 433 393 356 322 292

Other liabilities 4,470 4,635 7,606 7,728 7,851 7,977 8,105 8,234 8,366

Total liabilities 114,393 141,990 169,021 166,817 176,720 186,954 193,399 199,375 204,645

Common Equity 157,433 173,153 225,040 243,631 262,223 280,814 299,406 301,451 301,451

Accumulated other comprehensive income (loss), net of tax (883) (417) (1,133) (741) (741) (741) (741) (741) (741)

Retained earnings (accumulated deficit) 88,541 129,349 212,233 272,763 337,096 405,066 475,326 547,935 622,703

Common stock held in treasury, at cost - - - (29,600) (59,200) (99,200) (139,200) (179,200) (219,200)

Total stockholders' equity (deficit) 245,091 302,085 436,140 486,053 539,378 585,939 634,790 669,444 704,212

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 359,484 444,075 605,161 652,870 716,098 772,893 828,189 868,819 908,857

The Boston Beer Company

Cash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Cash flows from Operations: Cash flows from Operations:

Net income (loss) 59,467 70,392 90,743 Net Income 110,054 116,970 123,581 127,745 132,017 135,941

Adjustments to net cash from operations

Depreciation & amortization 20,208 25,903 35,138 Adjustments to net cash from operations

Impairment of long-lived assets 149 1,567 1,777 Depreciation & Amortization 45,788 49,294 53,578 56,749 58,339 59,738

Loss (gain) on disposal of property, plant & equipment 54 462 434 Gross Cash from Operations 155,843 166,264 177,159 184,494 190,356 195,680

Bad debt expense (recovery) 59 19 (16)

Stock-based compensation expense 6,528 7,318 6,857

Excess tax benefit from stock-based compensation arrangements (7,894) (5,282) (17,353)

Deferred income taxes 2,066 11,630 15,350 Changes in Working Capital Accounts:

Changes in Operating assets & liabilities: Accounts receivable, net (6,294) (2,662) (2,826) (1,766) (1,574) (1,360)

Accounts receivable (8,305) (10,542) 5,157 Inventories (6,232) (3,549) (3,768) (2,355) (2,099) (1,813)

Inventories (10,289) (12,036) 5,090 Prepaid expenses & other assets 70 (791) (839) (525) (468) (404)

Prepaid expenses, income tax receivable & other assets 6,123 (7,616) (9,447) Income taxes receivable 21,321 - - - - -

Accounts payable 8,002 3,173 884 Accounts payable 1,520 2,288 2,429 1,518 1,353 1,169

Accrued expenses & other current liabilities 19,491 14,633 4,578 Accrued expenses & other current liabilities 4,577 4,880 5,181 3,238 2,886 2,493

Other liabilities (329) 361 2,019 Other liabilities 122 124 126 128 130 132

Net cash flows from operating activities 95,330 99,982 141,211 15,083 290 303 238 228 217

Cashflows from Operations 170,926 166,554 177,462 184,732 190,584 195,897

Cash flows from investing activities:

Purchases of property, plant & equipment (66,010) (100,655) (151,784) Cash flows from investing activities:

Cash paid for acquisition of brewery assets & other intangible assets (1,726) (2,753) (100) Property, plant & equipment, gross (75,000) (85,000) (80,000) (70,000) (70,000) (70,000)

Change in restricted cash (628) 62 53 Other assets (199) (202) (206) (209) (212) (216)

Proceeds from disposal of property, plant & equipment 41 18 - Deferred income tax assets 6,915 (111) (106) (67) (69) (63)

Net cash flows from investing activities (67,323) (103,328) (151,831) (68,284) (85,314) (80,312) (70,276) (70,281) (70,279)

Cash flows from financing activities

Cash flows from financing activities Proceeds from exercise of stock options 18,591 18,591 18,591 18,591 2,045 -

Repurchase of class A common stock (18,046) (29,585) (7,859) Dividend Payments (49,524) (52,637) (55,611) (57,485) (59,408) (61,174)

Proceeds from exercise of stock options 5,727 2,541 27,272 Deferred income tax liabilities (8,368) 2,661 2,544 1,602 1,644 1,510

Proceeds from note payable 628 - - Current portion of debt & capital lease obligations (5) (5) (4) (4) (3) (3)

Cash paid on note payable & capital lease - (787) (53) Debt & capital lease obligations, less current portion (50) (45) (41) (37) (33) (30)

Excess tax benefit from stock-based compensation arrangements 7,894 5,282 17,353 Common Equity (Treasury Purchases) (29,600) (29,600) (40,000) (40,000) (40,000) (40,000)

Net proceeds from sale of investment shares 803 956 785 Accumulated other comprehensive income (loss), net of tax 392 - - - - -

Net cash flows from financing activities (2,994) (21,593) 37,498 (68,564) (61,034) (74,521) (77,332) (95,756) (99,697)

Change in cash & cash equivalents 25,013 (24,939) 26,878 Change in cash & cash equivalents 34,078 20,207 22,629 37,124 24,548 25,921

Cash & cash equivalents at beginning of year 49,450 74,463 49,524 Cash & cash equivalents at beginning of year 76402 110479.7 130686.65 153315.61 190439.58 214987.31

Cash & cash equivalents at end of year 74,463 49,524 76,402 Cash & cash equivalents at end of year 110,480 130,687 153,316 190,440 214,987 240,908

The Boston Beer Company

Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Net revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of goods sold 42.19% 44.41% 44.61% 42.61% 42.61% 42.61% 42.61% 42.61% 42.61%

Depreciation 3.48% 3.50% 3.89% 4.77% 4.84% 4.96% 5.07% 5.05% 5.04%

Gross profit 54.33% 52.08% 51.50% 52.61% 52.55% 52.43% 52.32% 52.34% 52.35%

Operating expenses:

Advertising, promotional & selling expenses 29.18% 28.13% 27.76% 27.00% 26.95% 26.93% 26.90% 26.88% 26.86%

General & administrative expenses 8.65% 8.43% 7.31% 7.28% 7.25% 7.25% 7.22% 7.22% 7.19%

Impairment of long-lived assets 0.03% 0.21% 0.20% 0.09% 0.09% 0.08% 0.08% 0.08% 0.08%

Settlement proceeds - - - - - - - - -

Total operating expenses 37.85% 36.78% 35.26% 34.37% 34.29% 34.26% 34.20% 34.18% 34.13%

Operating income 16.47% 15.30% 16.23% 18.24% 18.26% 18.17% 18.12% 18.16% 18.22%

Interest income (expense) 0.01% 0.004% 0.002% 0.002% 0.002% 0.002% 0.002% 0.002% 0.002%

Other income (expense), net -0.02% -0.08% -0.11% -0.03% -0.03% -0.02% -0.02% -0.02% -0.02%

Total other income (expense), net -0.01% -0.07% -0.11% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02%

Income (loss) before provision for income taxes 16.46% 15.23% 16.12% 18.22% 18.24% 18.15% 18.10% 18.14% 18.20%

Provision (benefit) for income taxes 6.21% 5.70% 6.07% 6.74% 6.75% 6.71% 6.70% 6.71% 6.74%

Net income (loss) 10.25% 9.52% 10.05% 11.48% 11.49% 11.43% 11.40% 11.43% 11.47%

The Boston Beer Company

Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Current Assets:

Cash & cash equivalents 12.83% 6.70% 8.46% 11.52% 12.84% 14.18% 17.00% 18.61% 20.32%

Accounts receivable, net 5.43% 5.68% 4.08% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%

Inventories 7.65% 7.63% 5.68% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

Prepaid expenses & other assets 1.14% 1.44% 1.43% 1.34% 1.34% 1.34% 1.34% 1.34% 1.34%

Income taxes receivable 0.28% 0.14% 2.36% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Deferred income taxes 0.93% 0.77% 0.96% 0.18% 0.18% 0.18% 0.18% 0.18% 0.18%

Total current assets 27.98% 22.23% 22.97% 23.54% 24.86% 26.20% 29.02% 30.63% 32.34%

Property, plant & equipment, gross 53.55% 55.43% 61.35% 65.59% 70.13% 73.45% 77.13% 80.85% 84.70%

Less accumulated depreciation 20.81% 19.37% 19.09% 22.75% 26.27% 29.70% 33.73% 37.76% 41.83%

Property, plant & equipment, net 32.74% 36.07% 42.26% 42.83% 43.85% 43.75% 43.40% 43.10% 42.86%

Other assets 0.80% 1.29% 1.38% 1.32% 1.26% 1.21% 1.18% 1.17% 1.15%

Goodwill 0.44% 0.50% 0.41% 0.38% 0.36% 0.34% 0.33% 0.32% 0.31%

TOTAL ASSETS 61.96% 60.09% 67.02% 68.08% 70.33% 71.50% 73.93% 75.21% 76.67%

Current Liabilities:

Accounts payable 4.88% 4.66% 3.94% 3.87% 3.87% 3.87% 3.87% 3.87% 3.87%

Current portion of debt & capital lease obligations 0.01% 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00%

Accrued expenses & other current liabilities 10.43% 9.46% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25%

Total current liabilities 15.32% 14.12% 12.20% 12.12% 12.12% 12.12% 12.12% 12.12% 12.12%

Deferred income taxes 3.53% 4.38% 5.62% 4.42% 4.42% 4.40% 4.39% 4.40% 4.41%

Debt & capital lease obligations, less current portion 0.10% 0.08% 0.06% 0.05% 0.04% 0.04% 0.03% 0.03% 0.02%

Other liabilities 0.77% 0.63% 0.84% 0.81% 0.77% 0.74% 0.72% 0.71% 0.71%

Total liabilities 19.72% 19.21% 18.72% 17.40% 17.36% 17.30% 17.27% 17.26% 17.26%

Common Equity 27.13% 23.43% 24.92% 25.41% 25.76% 25.98% 26.73% 26.10% 25.43%

Accumulated other comprehensive income (loss), net of tax-0.15% -0.06% -0.13% -0.08% -0.07% -0.07% -0.07% -0.06% -0.06%

Retained earnings (accumulated deficit) 15.26% 17.50% 23.50% 28.44% 33.11% 37.47% 42.43% 47.43% 52.53%

Common stock held in treasury, at cost 0.00% 0.00% 0.00% -3.09% -5.81% -9.18% -12.43% -15.51% -18.49%

Total stockholders' equity (deficit) 42.24% 40.87% 48.30% 50.68% 52.98% 54.21% 56.67% 57.95% 59.41%

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 61.96% 60.09% 67.02% 68.08% 70.33% 71.50% 73.93% 75.21% 76.67%

The Boston Beer Company

Value Driver Estimation

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

NOPLAT

Net Revenues 580,222 739,053 903,007 958,984 1,018,133 1,080,932 1,120,175 1,155,158 1,185,370

Less:

Cost of Sales 244,804 328,228 402,858 408,638 433,842 460,601 477,324 492,230 505,104

Depreciation 20,208 25,903 35,138 45,788 49,294 53,578 56,749 58,339 59,738

Advertising, promotional & selling expenses 169,306 207,930 250,696 258,926 274,387 291,095 301,327 310,506 318,391

General & administrative expenses 50,171 62,332 65,971 69,814 73,815 78,368 80,877 83,402 85,228

EBITA 95,733 114,660 148,344 175,818 186,796 197,289 203,899 210,679 216,909

Less Adjusted Taxes:

Marginal Tax Rate 35% 35% 35% 35% 35% 35% 35% 35% 35%

Income Tax Provision 36,050 42,149 54,851 64,635 68,697 72,579 75,025 77,534 79,839

Tax Shield on Non-operating Income & Expenses:

Impairment of long-lived assets 52 548 622 312 312 312 312 312 312

Settlement proceeds - - - - - - - - -

Other income (expense), net 34 583 994 91 91 91 91 91 91

Interest income (expense) 11 11 7 7 7 7 7 7 7

Adjusted Taxes 36,126 43,270 56,460 65,030 69,092 72,974 75,420 77,929 80,234

Add Change in Deferred Taxes:

Deferred Tax Liability 20,463 32,394 50,717 42,349 45,010 47,554 49,156 50,800 52,310

Deferred Tax Asset 5,411 5,712 8,685 1,770 1,881 1,987 2,054 2,123 2,186

Net Deferred Taxes 2,066 11,630 15,350 (1,453) 2,550 2,438 1,535 1,575 1,447

Change in deferred taxes 2,519 9,564 3,720 (16,803) 4,003 (112) (902) 40 (128)

NOPLAT 62,126 80,954 95,604 93,985 121,707 124,202 127,576 132,791 136,547

INVESTED CAPITAL

Net Operating Working Capital :

Normal Cash 11,604 14,781 18,060 19,180 20,363 21,619 22,403 23,103 23,707

Accounts receivable, net 31,479 42,001 36,860 43,154 45,816 48,642 50,408 51,982 53,342

Inventories 31,479 42,001 36,860 43,154 45,816 48,642 50,408 51,982 53,342

Prepaid expenses & other assets 44,361 56,397 51,307 57,539 61,088 64,856 67,210 69,309 71,122

Income taxes receivable 6,628 10,644 12,887 12,817 13,608 14,447 14,972 15,439 15,843

Operating Current Assets 125,551 165,824 155,974 175,845 186,690 198,206 205,401 211,816 217,356

Accounts payable 28,303 34,424 35,576 37,096 39,384 41,813 43,331 44,685 45,853

Accrued expenses & other current liabilities 60,529 69,900 74,539 79,116 83,996 89,177 92,414 95,301 97,793

Operating Current Liabilities 88,832 104,324 110,115 116,212 123,380 130,990 135,746 139,985 143,646

Net Operating Working Capital 36,719 61,500 45,859 59,632 63,310 67,216 69,656 71,831 73,710

Property, plant & equipment, net 189,948 266,558 381,569 410,781 446,487 472,909 486,160 497,820 508,082

Invested Capital 226,667 328,058 427,428 470,413 509,798 540,124 555,815 569,652 581,792

RETURN ON INVESTED CAPITAL (ROIC)

NOPLAT 62,126 80,954 95,604 93,985 121,707 124,202 127,576 132,791 136,547

Invested Capital t-1 181,940 226,667 328,058 427,428 470,413 509,798 540,124 555,815 569,652

ROIC 34.15% 35.72% 29.14% 21.99% 25.87% 24.36% 23.62% 23.89% 23.97%

FREE CASH FLOW (FCF)

NOPLAT 62,126 80,954 95,604 93,985 121,707 124,202 127,576 132,791 136,547

Invested Capital 226,667 328,058 427,428 470,413 509,798 540,124 555,815 569,652 581,792

Δ Invested Capital 44,727 101,391 99,370 42,985 39,384 30,327 15,691 13,836 12,140

FCF 17,399 (20,436) (3,766) 51,000 82,322 93,876 111,885 118,954 124,407

ECONOMIC PROFIT (EP)

BEG. IC 181,940 226,667 328,058 427,428 470,413 509,798 540,124 555,815 569,652

ROIC - WACC 27.27% 28.84% 22.27% 15.12% 19.00% 17.49% 16.75% 17.02% 17.10%

EP 49,623 65,378 73,060 64,612 89,380 89,169 90,459 94,594 97,400

The Boston Beer Company

Weighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 3.09%

Market Risk Premium 4.85%

Beta 0.78

Cost of Equity 6.87%

Risk Free Rate - 30 Yr US Treasury 3.09%

Spread on SAM Term Note 1.16%

Pretax Cost of Debt 4.25%

Marginal Tax Rate 35.00%

After tax Cost of Debt 2.76%

Equity :

Stock Price $201.9

No. of Shares Outstanding 13,016

Market Value (Thousands) $2,628,011

Debt:

Short Term Debt 55

Long term Debt 528

Total Value of Debt $583.0

Total Value $2,628,594.16

Equity Weight 99.98%

Debt Weight 0.022%

WACC 6.87%

Cost of Equity (CAPM)

Cost of Debt

Weights

The Boston Beer Company

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 2.62%

CV ROIC 23.97%

WACC 6.87%

Cost of Equity 6.87%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E

DCF Model

Free Cash Flow 51,000 82,322 93,876 111,885 118,954 124,407

Continuing Value 2,857,847

Periods to Discount 1 2 3 4 5

Discounted Free Cash flow 47,721 72,076 76,906 85,766 2,135,150

Sum of Discounted FCF 2,417,618

Add:

Excess Cash 58,342

Other assets 12,447

Less:

Current portion of debt & capital lease obligations 55

Debt & capital lease obligations, less current portion 528

Other liabilities 7,606

Equity Value 2,480,218

Shares Outstanding ('000) 13,016

Share Price @ Dec. 2014 190.55

Current Share Price $201.90

EP ModelFiscal Years Ending 2015E 2016E 2017E 2018E 2019E 2020E

Invested Capital 427,428

Economic Profit 64,612 89,380 89,169 90,459 94,594 97,400

Continuing Value 2,288,195

Periods to Discount 1 2 3 4 5 6

Discounted EP 60,457 78,255 73,050 69,341 1,709,087

Sum of Discounted EP 1,990,190

Invested Capital 427,428

Add:

Excess Cash 58342

Other assets 12447

Less:

Current portion of debt & capital lease obligations 55

Debt & capital lease obligations, less current portion 528

Other liabilities 7606

Equity Value 2,480,218

Shares Outstanding ('000) 13,016

Share Price @ Dec. 2014 190.55

Current Share Price $201.90

Today 11/6/2015

Next FYE 12/31/2015

Last FYE 12/31/2014

Days in FY 365

Days after FYE 310

Elapsed Fraction 0.849

R* 6.87%

Price Today ( 10 months time elapse) $201.61

Target Year-end Price (Dec. 2015) $203.86

The Boston Beer Company

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E

EPS 8.32$ 8.71$ 9.09$ 9.28$ 9.67$ 10.07$

Key Assumptions

CV growth 2.62%

CV ROE 20.31%

Cost of Equity 6.87%

Future Cash Flows

P/E Multiple (CV Year) 20.46

EPS (CV Year) 10.07$

Future Stock Price 205.99$

Dividends Per Share 3.74 3.92 4.09 4.18 4.35

Discounting Periods 1 2 3 4 5

Discounted Cash Flows 3.50 3.43 3.35 3.20 150.86

Intrinsic Value 164.35$

Today 11/6/2015

Next FYE 12/31/2015

Last FYE 12/31/2014

Days in FY 365

Days after FYE 310

Elapsed Fraction 0.849

R* 6.87%

Price Today ( 10 months time elapse) $173.90

Target Year-end Price (Dec. 2015) $175.84

The Boston Beer CompanyRelative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15

BREW Craft Brew Alliance $7.01 $0.10 $0.24 70.1 29.2 25.00 2.80

STZ Constellation Brands, Inc. Class A $132.11 $5.11 $5.81 25.9 22.7 14.35 1.80

BUD Anheuser-Busch Inbev Sa $118.96 $4.95 $5.23 24.0 22.7 6.90 3.48

DEO Diageo plc $113.55 $5.55 $6.05 20.5 18.8 4.90 4.18TAP Molson Coors Brewing Company Class B $87.57 $3.82 $3.91 22.9 22.4 3.20 7.16

23.3 23.2 10.9 3.9

P/E 15 P/E 16 PEG 15

HEIA-NL Heineken NV $89.67 $3.53 $3.86 25.4 23.2 2.30

GCC-IE C&C Group Plc $3.93 $0.26 $0.27 15.1 14.6 15.60 SAB-GB SABMiller plc (SAB-GB) $60.07 $1.48 $1.59 40.6 37.8 5.90

Average 27.0 25.2 7.9

SAM The Boston Beer Company $201.90 8.32 8.71 24.3 23.2 6.8

Implied Value:US Traded Comparables

Relative P/E (EPS15) $ 194.01

Relative P/E (EPS16) 201.88$

PEG Ratio (NTM) 220.07$

Non-US Traded Stocks

Relative P/E (EPS15) $ 224.94

Relative P/E (EPS16) 219.46$

PEG Ratio (NTM) 449.34$

Non-US Traded Stocks

The Boston Beer Company

Key Management Ratios

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Liquidity RatiosCurrent RatioCurrent Assets/Current Liabilities 1.83 1.57 1.88 1.94 2.05 2.16 2.39 2.53 2.67Quick RatioCurrent Assets - Inventories/Current Liabilities 1.33 1.03 1.42 1.45 1.56 1.67 1.90 2.03 2.17Cash RatioCash & Cash equivalents/Current Liabilities 0.84 0.47 0.69 0.95 1.06 1.17 1.40 1.54 1.68

Activity or Asset-Management Ratios

Total Asset Turnover

Net Sales/Avg. Total Assets 1.84 1.84 1.72 1.52 1.49 1.45 1.40 1.36 1.33

Inventory Turnover

Cost of Sales/Avg. Inventory 6.24 6.52 7.48 7.51 7.31 7.31 7.23 7.21 7.19

Financial Leverage Ratios

LT Liabilities Ratio

Total Long-term Liabilities/Total Assets 0.0016 0.0013 0.0009 0.0007 0.0006 0.0005 0.0004 0.0004 0.0003

Equity Multiplier

Total Assets/Total Equity 1.47 1.47 1.39 1.34 1.33 1.32 1.30 1.30 1.29

Profitability Ratios

Gross Profit Margin

Gross Profit/Net Sales 54% 52% 51% 53% 53% 52% 52% 52% 52%

Net Profit Margin

Net Income/Net Sales 10% 10% 10% 11% 11% 11% 11% 11% 11%

ROA

Net Income/Avg. Total Assets 19% 18% 17% 17% 17% 17% 16% 16% 15%

ROE

Net Income/Avg. Total Equity 28% 18% 25% 24% 23% 22% 21% 20% 20%

Payout Policy RatiosDividend PayoutDividends/Net Income 0% 0% 0% 45% 45% 45% 45% 45% 45%

Total Payout

Dividends + Treasury Repurchases/Net Income 30% 42% 9% 72% 70% 77% 76% 75% 74%

Retention Ratio

(Net Income-Dividends)/Net Income 70% 58% 91% 28% 30% 23% 24% 25% 26%

$203.86 0.33 0.48 0.63 0.78 0.93 1.08 1.23

1.42% 287.83 236.14 200.39 174.19 154.18 138.41 125.65

1.82% 317.70 254.40 212.40 182.52 160.17 142.83 129.00

2.22% 357.23 277.22 226.87 192.27 167.04 147.84 132.73

2.62% 412.00 306.56 244.61 203.86 175.02 153.54 136.93

3.02% 492.93 345.67 266.89 217.85 184.39 160.11 141.69

3.42% 624.66 400.41 295.70 235.08 195.55 167.74 147.12

3.82% 876.89 482.48 334.41 256.82 209.07 176.73 153.37

$203.86 1.59% 2.09% 2.59% 3.09% 3.59% 4.09% 4.59%

20.00% 311.89 264.94 230.49 204.14 183.34 166.51 152.61

25.00% 311.75 264.82 230.38 204.05 183.26 166.43 152.54

30.00% 311.61 264.69 230.28 203.95 183.17 166.35 152.46

35.00% 311.47 264.57 230.17 203.86 183.09 166.28 152.39

40.00% 311.33 264.45 230.06 203.76 183.00 166.20 152.32

45.00% 311.18 264.33 229.96 203.67 182.92 166.12 152.25

50.00% 311.04 264.21 229.85 203.57 182.83 166.04 152.18

$203.86 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%

1.59% 202.84 229.30 264.00 311.47 380.37 489.44 688.23

2.09% 182.11 203.06 229.67 264.57 312.37 381.81 491.92

2.59% 165.32 182.33 203.40 230.17 265.30 313.45 383.48

3.09% 151.44 165.55 182.66 203.86 230.80 266.18 314.70

3.59% 139.78 151.68 165.87 183.09 204.42 231.55 267.20

4.09% 129.85 140.03 151.99 166.28 183.61 205.10 232.43

4.59% 121.30 130.11 140.34 152.39 166.77 184.23 205.88

$203.86 0.70% 1.00% 1.30% 1.60% 1.90% 2.20% 2.50%

0.33 288.22 320.15 360.23 412.00 481.46 579.57 728.61

0.48 232.70 252.94 277.14 306.56 343.12 389.75 451.31

0.63 195.41 209.41 225.62 244.61 267.17 294.41 327.94

0.78 168.65 178.92 190.56 203.86 219.19 237.07 258.19

0.93 148.51 156.39 165.17 175.02 186.14 198.81 213.35

1.08 132.82 139.06 145.94 153.54 162.00 171.46 182.11

1.23 120.25 125.33 130.87 136.93 143.59 150.95 159.11

Depletion Growth rate

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Inflation Rate

Bet

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Beta

Risk Free Rate

CV

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Tax