Group 4

Jose Aleman

Andrew Fulham

Scott Sorensen

Stephanie Soybel

Taylor Williams

Boston Beer Company

Recommendation

We value Boston Beer Company (NYSE: SAM) at $63.38 per share, and recommend that investors hold these securities.Current Market Price of $65.21Increased competition will hinder revenue growth

and company expansion Market Growth within Industry Stagnation

Overview

Financials

Strategy

Valuation

Agenda

Boston Beer Company History

Overview Financials Strategy Valuation

• Jim Koch founds Boston Beer1984

• IPO at $20 per share1995

• Twisted Tea launched2001

• Sam Adams Light launched2002

• Purchase of PA brewery2007

• Product recall in April2008

.

.

. .

.

Boston Beer FeelsCompetition from All Sides

Imports Wine & Spirits

Craft Beers Industry Leaders

Overview Financials Strategy Valuation

Consolidation ofDomestic Beer Production

Boston Beer Company 1%

AB InBev 50%

Miller-Coors29%

Other 20%

Domestic Beer Production

Source: www.ibisworld.com

Overview Financials Strategy Valuation

Domestic Beer Production is Decreasing

2001 2002 2003 2004 2005 2006 2007 2008 2009$188

$190

$192

$194

$196

$198

$200

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

Total Domestic Beer Production

Produced% change

Source: www.ibisworld.com

Overview Financials Strategy Valuation

Craft, Import, and Specialty Beer

20% of Domestic Beer Market

Category profitability realized by Major Brewers

Samuel Adams is the largest domestic brewer and 3rd largest Brewer in the Better Beer Category

Boston Beer operates within the “Better Beer” category

Overview Financials Strategy Valuation

Craft Beer experienced 12%

growth in 2009

6th Straight year this category has outperformed the

Beer Industry

Major Craft Beers: • Sam Adams• Sierra Nevada• New Belgium

Craft Beer drinkers are loyal to the Craft Beer

Industry

Craft Beer: Growth within Stagnation

Overview Financials Strategy Valuation

Top Selling US Craft Beers in 2009

1) Sierra Nevada Pale Ale

2) Samuel Adams Boston Lager

3) Sam Adams Seasonal

4) New Belgium Fat Tire Amber Ale

5) Shiner Bock

6) Widmer Hefeweizen

7) Sam Adams Variety Pack

8) Sam Adams Lite

Boston Beer sells 2 of the top 3 Craft Beers

Source: Beverage Industry Magazine

Overview Financials Strategy Valuation

3 Tier Distribution System

Brewery Wholesalers Retailers

Overview Financials Strategy Valuation

Boston Beer Co. (SAM)

8 Flavored Malt Beverages

(13%) 20 Unique Beers (87%)1 Hard Cider (0.06%)

Diverse Product Portfolio

Overview Financials Strategy Valuation

Current Market Analysis

Current Consumer Base

• Specific Market Segment

• “Beer Lovers”• Quality over

price

Strengths

• Niche Market• Highly Trained

Sales force• Brand

Differentiation

Overview Financials Strategy Valuation

Market Opportunities and Risk

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$50

$100

$150

$200

$250

$300

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Advertising Expenditures

Advertising Expense

As % of Revenue

Overview Financials Strategy Valuation

Overview

Financials

Strategy

Valuation

2005-2009 CAGR of 14.5%

Growth rate slowed to almost zero in 2009

2005 2006 2007 2008 2009$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

$500.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Revenue

Revenue

Rev Growth

Historical Revenue Growth

Overview Financials Strategy Valuation

Projected revenue growth at 14%

Projected Revenue

2010 2011 2012 2013 2014$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

$800.00

$900.00

$1,000.00

10.00%

10.50%

11.00%

11.50%

12.00%

12.50%

13.00%

13.50%

14.00%

14.50%

Projected Revenue

RevenueRevenue Growth

Overview Financials Strategy Valuation

Establishment of a new brewery allowed Boston Beer to decrease its production costs slightly

In the future, Boston Beer is not expected to further reduce costs by more than 2%

Cost of Goods Sold

Overview Financials Strategy Valuation

2005 2006 2007 2008 20090.00

50.00

100.00

150.00

200.00

250.00

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Cost of Goods Sold

COGS

COGS as % of Revenue

Industry Average

Financial Analysis

• Can finance its own capital expenditures

• ABInbev:12.55%• SABMiller:10.6%

Net profit margin of 7.5% in 2009

Boston Beer has no short or long term debt

Financial Analysis

Source: Global Business Browser

Overview Financials Strategy Valuation

Overview

Financials

Strategy

Valuation

Overview Financials Strategy Valuation

Competitive Strengths

Consumer preferences are shifting towards premium beer

Leadership built on scale, quality and branding

Agreements with suppliers and distributors yield stability and predictability.

Threats

Increasingly competitive segmentLow switching costs among consumersIntensified efforts from industry leaders to

penetrate the marketLow barriers to entry at the microbrewer

level Need to increase differentiation from

premium products in wine and spirits industry

Overview Financials Strategy Valuation

Opportunities

Geographic expansionDomesticInternational – Emerging markets

RisksDirect competition with regional brewersCompetition with major industry leaders

Product diversification

Overview Financials Strategy Valuation

Overview

Financials

Strategy

Valuation

Discounted Cashflow Analysis

Base Case 2010 2011 2012 2013 2014

           

Total Revenue $480.69 $547.99 $624.71 $ 712.17 $811.87

Cost of Revenue, Total 217.09 247.48 282.13 321.63 366.65

Gross Profit 263.61 300.51 342.58 390.55 445.22

           

Income After Tax 45.04 51.34 58.53 66.73 76.07Depreciation 10.19 11.62 13.25 15.10 17.21

ΔNWC 7.27 8.29 9.45 10.77 12.28Discounted Cashflow $44.08 $46.19 $48.40 $50.71 $53.13

Perpetuity Growth 3.5%

Terminal Value

$657.57

Enterprise Value

$900.07    Debt to Equity Ratio 0Equity Value per Share $63.38        Current Market Value $65.21

Overview Financials Strategy Valuation

Best and Worst Cases

Base Optimistic Pessimistic

Revenue Growth Rate 14% 16% 12%

COGS % of Revenue 42% 41% 43%

Perpetuity Growth Rate 3.5% 4% 3%

Equity Value per Share $63.38 $77.07 $52.54

Current Market Value $65.21

Overview Financials Strategy Valuation

Sensitivity Analysis

Overview Financials Strategy Valuation

COGS as % of RevenueAdvertising Expenses as % of Revenue

Revenue Growth Rate$45.00

$50.00

$55.00

$60.00

$65.00

$70.00

$75.00

$80.00

Sensitivity Analysis of Equity Value per Share

-10 Pct +10 Pct

Eq

uit

y V

alu

e p

er

Sh

are

Sensitivity Analysis

5.00% 7.00% 9.00% 11.00% 13.00% 15.00%$41.00$46.00$51.00$56.00$61.00$66.00$71.00$76.00$81.00$86.00$91.00

Discount Rate vs Equity Value per Share

Discount Rate

Eq

uit

y V

alu

e p

er S

har

e

Overview Financials Strategy Valuation

Recommendation

We value Boston Beer Company (NYSE: SAM) at $63.38 per share, and recommend that investors hold these securities.Current Market Price of $65.21Increased competition will hinder revenue growth

and company expansion Market Growth within Industry Stagnation

Appendices

Five Forces Summary•S

table and predictable

Suppliers

•Pressure to differentiate

Customers

•High threat, moderate barriers

New entrants

•Craft beer is not wine

Substitutes

•Secure niche market

Competition

Larger Competition

AB InbevShock TopColorado NativeRedhook

MillerCoors produces several craft beers Blue MoonHenry WeinhardLeinenkugel

Assumptions

 

Revenue Growth Rate 14%

Recalls 0

COGS % of Revenue 42%

SG&A 8%

Income Tax 44%

Excise Taxes -7.0%

Advertisement Expense 28%

Perpetuity Growth 3.5%

β 0.80

Risk Premium 6%

30-Year Bond Rate 4.00%

Discount Rate 8.80%

Income Statement 2005-2014

Year Ending (December)(in Millions) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Gross Revenue 263.3 315.3 380.6 449.6 453.4 516.9 589.2 671.7 765.8 873.0

Sales Returns and Allowances 0.0 0.0 0.0 -13.2 0.0 0.0 0.0 0.0 0.0 0.0

Excise Tax Receipts -25.0 -29.8 -38.9 -37.9 -38.4 -36.2 -41.2 -47.0 -53.6 -61.1

Revenue 238.3 285.4 341.6 398.4 415.1 480.7 548.0 624.7 712.2 811.9

Total Revenue 238.3 285.4 341.6 398.4 415.1 480.7 548.0 624.7 712.2 811.9

Cost of Revenue 96.8 121.2 152.3 214.5 201.2 217.1 247.5 282.1 321.6 366.7

Cost of Revenue, Total 96.8 121.2 152.3 214.5 201.2 217.1 247.5 282.1 321.6 366.7

Gross Profit 141.5 164.3 189.4 183.9 213.8 263.6 300.5 342.6 390.5 445.2

Selling/General/Administrative Expense 17.3 22.7 24.6 35.0 36.9 41.4 47.1 53.7 61.3 69.8

Advertising Expense 100.9 113.7 124.5 132.9 121.6 144.7 165.0 188.1 214.4 244.4

Total Selling/General/Administrative Expenses 118.2 136.3 149.0 167.9 158.5 186.1 212.1 241.8 275.7 314.3

Impairment-Assets Held for Use 0.0 0.0 3.4 1.9 1.0 0.0 0.0 0.0 0.0 0.0

Unusual Expense (Income) 0.0 0.0 3.4 1.9 1.0 0.0 0.0 0.0 0.0 0.0

Total Operating Expense +COGS 215.0 257.5 304.8 384.3 360.8 403.2 459.6 524.0 597.3 680.9

Operating Income 23.3 28.0 36.9 14.1 54.3 77.5 88.4 100.8 114.9 130.9

Interest Income - Non-Operating 1.8 3.1 4.3 1.6 0.1 2.5 2.8 3.2 3.7 4.2

Interest/Investment Income - Non-Operating 1.8 3.1 4.3 1.6 0.1 2.5 2.8 3.2 3.7 4.2

Interest Income (Expense) - Net Non-Operating Total 1.8 3.1 4.3 1.6 0.1 2.5 2.8 3.2 3.7 4.2

Other Non-Operating Income (Expense) 0.4 0.7 0.5 0.2 0.0 0.4 0.5 0.5 0.6 0.7

Other, Net 0.4 0.7 0.5 0.2 0.0 0.4 0.5 0.5 0.6 0.7

Income Before Tax 25.5 31.8 41.6 15.8 54.4 80.4 91.7 104.5 119.2 135.8

Total Income Tax 10.0 13.6 19.2 7.8 23.2 35.4 40.3 46.0 52.4 59.8

Net Income 15.6 18.2 22.5 8.1 31.1 45.0 51.3 58.5 66.7 76.1

Source: Global Business Browser / Reuters

Balance Sheet 2005-2009

2005 2006 2007 2008 2009Cash and Short Term Investments 63.9 82.4 95.5 9.1 55.5Total Receivables, Net 9.5 17.8 20.1 31.1 22.6Total Inventory 13.6 17 18.1 22.7 25.6Other Current Assets, Total 2 3.4 4.3 6 9.4Total Current Assets 89.2 120.6 137.9 68.9 113Property/Plant/Equipment - Net 26.5 30.7 46.2 147.9 147Other Long Term Assets, Total 3.4 3.2 13.9 3 2.9

Total Assets 119.1 154.5 198 219.8 262.9

Accounts Payable 11.4 17.9 17.7 20.2 25.3Accrued Expenses 15.6 19.6 20.4 23.5 21.4Notes Payable/Short Term Debt 0 0 0 0 0Other Current liabilities, Total 3.4 6.6 44 46.7 54.2Total Current Liabilities 28.7 40.9 60.2 67.1 73.8

Other Liabilities, Total 4.3 5 4.2 12.7 16Total Liabilities 33.1 45.9 64.4 79.7 89.8

Common Stock 0.1 0.1 0.1 0.1 0.1Additional Paid-In Capital 70.8 80.2 88.8 102.7 111.7

Retained Earnings (Accumulated Deficit) 15.6 28.5 44.9 37.7 61.7Other Equity, Total -0.5 -0.2 -0.2 -0.4 -0.4Total Equity 86 108.6 133.6 140 173.2

Total Liabilities & Shareholders’ Equity 119.1 154.5 198 219.8 262.9

Source: Global Business Browser / Reuters

Name Position Board

C. James Koch Chairman Executive

Martin F. Roper President & CEO Executive

William F. Urich CFO & Treasurer Executive

Thomas W. Lance VP, Operations Executive

John C. Geist VP, Sales Executive

David L. Grinnell VP, Brewing Executive

David A. Burwick Class A Director Non-Executive

Pearson C. Cummin, III Class A Director Non-Executive

Charles Joseph Koch Class B Director Non-Executive

Jay Margolis Class B Director Non Executive

Gregg A. Tanner Class B Director Non-Executive

Jean-Michel Valette Class A Director Non-Executive

Key Employees

SWOT

•Strengths• Strong recent financial performance• Robust network of breweries for local

distribution• Diversified in products and geographical

distribution• Strong market position• Expanding market share• Strong growth prospects

•Weaknesses• Much smaller player than most

competitors• Declining profitability• Limited liquidity position• Low return on equity• Product recalls

•Opportunities• Focused strategy on reducing• Dependencies on other brewers• Production expansion• Growing craft beer market

•Threats• Changing consumer preferences• Limitations on advertising• Stringent governmental regulations• Consolidation in beer industry

Financial Ratios

Boston Beer AB Inbev SABMiller Heineken Industry

ROI 15.16% 7.95% 8.36% 9.26% 9.40%

Current Ratio 1.53 0.76 0.65 0.78 1.87

Return on Assets 12.90% 5.20% 5.00% 5.60% 6.19%

Gross Margin 47.10% 54.16% 52.73% 34.36% 44.62%

Source: Global Business Browser

Final Notes

A large amount of information in this presentation was taken from the Boston Beer Company 2009 10k

40

Sensitivity Analysis

40% 42% 44% 46% 48% 50%30

35

40

45

50

55

60

65

70

COGS vs. SAM Share Value

COGS (% of Total Revenue)

Eq

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($

)

20%

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

45

50

55

60

65

70

75

80

85

90

Advertising vs. SAM Share Value

Advertising Expenses(% of Total Revenue)

Eq

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($

)