Boston Beer Co., Inc.

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Richard Navratil, Meghan Neff, Reece Hill, Antwan Clark MBA 6157 – Managerial Finance

BOSTON BEER CO., INC. For The Love of Beer

Boston Beer Co., Inc.

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Contents Executive Summary ...................................................................................................................................... 3

Boston Beer Co., Inc. History .................................................................................................................... 3

Porter’s 5 Forces ....................................................................................................................................... 3

Introduction of Industry ............................................................................................................................... 3

Economic Impact ....................................................................................................................................... 3

Industry ..................................................................................................................................................... 4

Major Players & Competitors ................................................................................................................... 4

Company Operations ................................................................................................................................... 5

Capital Allocations .................................................................................................................................... 5

Financial Statement Summary .................................................................................................................. 6

Exhibit 1................................................................................................................................................. 8

Exhibit 2................................................................................................................................................. 9

Exhibit 3............................................................................................................................................... 10

Exhibit 4............................................................................................................................................... 10

Exhibit 5............................................................................................................................................... 11

Exhibit 6............................................................................................................................................... 11

Equity Analysis............................................................................................................................................ 12

P/E Ratio .................................................................................................................................................. 13

P/Sales Ratio ........................................................................................................................................... 13

EV/EBITDA Ratio...................................................................................................................................... 14

Projected Earnings .................................................................................................................................. 14

Growth Rate ............................................................................................................................................ 15

Stock Prices ............................................................................................................................................. 15

Recommendations ..................................................................................................................................... 16

Message from the CEO ........................................................................................................................... 16

Our Recommendation ............................................................................................................................. 16

Sources ........................................................................................................................................................ 17

Boston Beer Co., Inc.

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Executive Summary

Boston Beer Co., Inc. History

Jim Koch is credited with the creation of the Samuel Adams brand, making a debut in April of

1985 with an initial release to 25 bars and restaurants in Boston. Three years later (after learning of the

beer’s success), partners, Rhonda Kallman and Koch built a small brewery in Boston to meet the 36,000-

barrel demand. Today, in its 31-year long existence, the brewery employs about 1,400 people and has

breweries in Boston, Cincinnati and Pennsylvania. They carry over 50 kinds of beers all over the US and

in 20 foreign countries. [1]

The brewery identifies as Small (annual production <6 mil. barrels), Independent (< than ¼ is

owned by non-craft brewers) and Traditional (>50% of beers brewed as malts). [2]

Porter’s 5 Forces SWOT Analysis

Introduction of Industry

Economic Impact

The beer industry itself supplies 1.5% of the

overall U.S. GDP, or $252.6 billion. Jobs linked to beer

(production, distribution, sales and more) provide living

for 1.75 million Americans, while the direct brewers and

importers employ 49,576 Americans. Of these, about

70% are linked to large or midsize breweries.

Item Desired Beer industry

Supplier power LOW Medium

Buyer power LOW Low/Medium

Rivalry/competition LOW High

Threat of substitution LOW Low/Medium

Threat of new entrants LOW Low

Data 1

Strengths: High brand loyalty, R&D Weaknesses: ⇧ R&D costs (short-term income ⇩) Opportunities: Wine expansion Threats: ⇧ prices of ingredients (barley, wheat)

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A proof that beer industry supports the economic growth is highlighted by the jobs in the

supplier industry, such as bottle and can manufacturers, cardboard boxes and more – these all

generate about $83 billion and supply the country with over 380,000 jobs. Furthermore, the

taxation level of almost 40% brings in $48.5 billion in tax revenue to the federal government. [3]

Industry

Beer brewing is a growing industry

overall, especially for the craft and small-

size breweries such as Samuel Adams.

Although the overall beer production

decreased by 0.2% from 2014 to 2015

(mainly caused by major breweries), the

craft beer industry enjoyed a 12.8%

increase in sales, reaching over 24 billion

barrels sold. Of the overall $105.9 billion beer market in 2015, the craft beer market accounted

for 15% (22.3 billion), as you may see in the picture above. [4]

Major Players & Competitors

The Chairman of Samuel Adams and the main brewer, Jim Koch, actually supports smaller

competition and gives out microloans to craft brewers around him. He claims his reasoning in the

following way: “The reason I support competitors becomes obvious if you think about the way yeast

ferments beer. If enough yeast are working together, they can change the ecosystem for the mutual

benefit of all. If they aren't, other organisms take over, and the yeast will fail. Craft brewing is kind of

like that.” [5]

[4]

Boston Beer Co., Inc.

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He further worked with his R&D team to develop a new can that gives the beer more air to

make it taste less like a canned beer. He allowed the manufacturer to use their license and give it to

other craft breweries for free. This process allows for the microbreweries to differentiate themselves

from the major competitors and larger breweries. [5]

According to the Hoover’s Industry Analysis, the three biggest competitors for the Boston

Beer Company Inc. are Heineken N.V., Anheuser-Busch InBev SA/NV and Millercors LLC. As the

biggest US craft beer producer, the company tries to keep up with the largest beer maker in the

world, Anheuser-Bush InBev. [6]

Currently, Boston Beer Inc. employs 1,429 employees with a growth of 7.85%. In

comparison to the biggest beer manufacturer in the world, that is over 150 thousand employees

less, however, the employees at Anheuser-Busch InBev are currently experiencing a 1.11% loss,

whereas Boston Beer Inc. enjoys a growth. Furthermore, in the year of 2015, net income of

Anheuser-Busch dropped over ten percent, while sales dropped 7.35.

In conclusion, the nature of Boston Beer Inc.’s business allows them to stay afloat and enjoy

growth, while other major breweries are experiencing down-years and decreases in sales. [7]

Company Operations

Capital Allocations

Alchemy & Science was founded by Alan Newman, co-founder of Magic Hat Brewing Company

and Stacey Steinmetz, Magic Hat’s first employee. In 2011 Alan had a beer with Alan Koch, the two are

old friends, and discussed the opportunities that existed in the craft brewing industry. Koch offered

Newman and Steinmetz the freedom to operate independently and to operate Alchemy & Science as

they “see best, finding, creating and managing craft beer opportunities”. [8] Alan Newman says that this

Boston Beer Co., Inc.

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was, “the proverbial ‘offer that is too good to pass up’”. [8] Today Alchemy & Science is an

“independently operated” subsidiary of The Boston Beer Company; they have Jim Koch, the brewers,

and resources at The Boston Beer Company to utilize in their quest to create great beer. [8]

Alchemy & Science hit the ground running, announcing its first project in 2011, The

Traveler Beer Company. These brews are now available in all 50 states of the U.S. Next, in 2012,

Alchemy & Science acquired Angel City Brewery, located in downtown Los Angeles, California.

[9] In 2015 Angel City brewery expanded to Las Vegas and by 2016 Alchemy and Science

brought Angel City brews to the entire state of California. [8] Alchemy & Science purchased the

Coney Island brand from Schmaltz Brewery Company in 2013. Finally, in October of 2013,

Alchemy & Science began construction of the new Concrete Beach Brewery, located in the

Wynwood Arts District of Miami. The Concrete Beach Brewery opened its’ doors to the public in

2015. [9]

Financial Statement Summary

Overall, The Boston Beer Company is extremely financially sound and healthy. The company’s

cash and equivalents have been steadily from 2013 to 2015 (see exhibit 1) and has increased

consistently in terms of percentage of total assets from 11.2%-12.6%-14.6%, respectively (see exhibit 1).

In comparison to the industry Boston Beer Company’s current and quick ratios are above average, with

excellent ratios of 2.012 and 1.504, respectively (see exhibit 3). Its’ long-term debt and leases has

steadily decreased for the past three years (see exhibit 1) and its’ debt management is performing very

well with a total debt-to-equity ratio of 0.399 in 2015, 86.83% lower than the industry average (see

exhibit 5). The Boston Beer Company’s asset management is performing above average in regards to

inventory turnover and total asset turnover, and is only slightly below industry average in net property,

plant and equipment turnover (see exhibit 4). Although Boston Beer is above industry average in regards

Boston Beer Co., Inc.

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to its’ inventory turnover, its’ inventories held on the balance sheet increased by 10% from 2014 to

2015; inventory purchase decisions should be improved upon by executive management (see exhibit 1).

The company’s profitability is steadily climbing with a 4.64% increase from 2014 to 2015, along with its’

net income which increased by 8.454% from 2014 to 2015 (see exhibit 2). Finally, The Boston Beer

Company’s net profit margin and operating margin are both healthy and significantly above industry

average with ratios of 10.252% and 16.269%, respectively (see exhibit 6).

Boston Beer Co., Inc.

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Exhibit 1

Standardized Annual Balance Sheet

Report Date 12/26/2015 12/27/2014 12/28/2013 12/26/2015 12/27/2014 12/28/2013

Scale Thousands Thousands Thousands Thousands Thousands Thousands Comments (thousands)

Cash & Equivalents 94,193 76,402 49,524 14.6% 12.6% 11.2% Steadily increasing (2014-2015 increase of 23.286%)

Cash & Equivs & ST Investments 94,193 76,402 49,524 14.6% 12.6% 11.2%

Receivables (ST) 40,568 37,367 42,981 6.3% 6.2% 9.7%

Inventories 56,462 51,307 56,397 8.7% 8.5% 12.7% Increasing from 2014 by 10%

Current Tax Assets 21,911 30,006 6,750 3.4% 5.0% 1.5%

Prepayments (ST) 4,231 5,377 8,273 0.7% 0.9% 1.9%

Other Current Assets 6,238 7,003 353 1.0% 1.2% 0.1%

Total Current Assets 223,603 207,462 164,278 34.6% 34.3% 37.0%

Gross Property Plant & Equip 617,214 553,979 409,689 95.6% 91.5% 92.3%

Accumulated Depreciation 207,288 172,410 143,131 32.1% 28.5% 32.2%

Net Property Plant & Equip 409,926 381,569 266,558 63.5% 63.1% 60.0% Steadily increasing (2014-2015 increase of 7.432%)

Intangible Assets 3,683 3,683 3,683 0.6% 0.6% 0.8%

Other Assets 8,188 12,447 9,556 1.3% 2.1% 2.2%

Total Assets 645,400 605,161 444,075 100.0% 100.0% 100.0%

Accounts Payable & Accrued Exps 107,153 104,081 95,496 16.6% 17.2% 21.5%

Accounts Payable 42,718 35,576 34,424 6.6% 5.9% 7.8% Increased by 7,142 (20.075%) from 2014

Accrued Expenses 64,435 68,505 61,072 10.0% 11.3% 13.8%

Current Debt 58 55 53 0.0% 0.0% 0.0%

Other Current Liabilities 3,949 6,034 8,828 0.6% 1.0% 2.0%

Total Current Liabilities 111,160 110,170 104,377 17.2% 18.2% 23.5%

LT Debt & Leases 471 528 584 0.1% 0.1% 0.1% Steadily decreasing (2014-2015 decrease of 10.795%)

Deferred LT Liabilities 56,001 50,717 32,394 8.7% 8.4% 7.3%

Other Liabilities 16,547 7,606 4,635 2.6% 1.3% 1.0%

Total Liabilities 184,179 169,021 141,990 28.5% 27.9% 32.0%

Common Share Capital 128 131 128 0.0% 0.0% 0.0%

Additional Paid-In Capital 290,096 224,909 173,025 44.9% 37.2% 39.0%

Retained Earnings 171,948 212,233 129,349 26.6% 35.1% 29.1%

Accum Other Comprehensive Income (951) (1,133) (417) -0.1% -0.2% -0.1%

Other Equity - - - 0.0% 0.0% 0.0%

Total Equity 461,221 436,140 302,085 71.5% 72.1% 68.0%

Total Liabilities & Equity 645,400 605,161 444,075 100.0% 100.0% 100.0%

Common Size Balance Sheet

Boston Beer Co Inc (The) (NYS: SAM)

Boston Beer Co., Inc.

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Exhibit 2

Standardized Annual Income

Statement

Report Date 12/26/2015 12/27/2014 12/28/2013 12/26/2015 12/27/2014 12/28/2013

Scale Thousands Thousands Thousands Thousands Thousands Thousands Comments

Sales Revenue 959,934 903,007 739,053 100.0% 100.0% 100.0% Increasing but not as drastic as 2013-2014 (2014-2015 increase of 6.304%)

Total Revenue 959,934 903,007 739,053 100.0% 100.0% 100.0%

Direct Costs 458,317 437,996 354,131 47.7% 48.5% 47.9% Increasing but slowing compared to 2013-2014 (2015-2015 increase of 4.64%)

Gross Profit 501,617 465,011 384,922 52.3% 51.5% 52.1%

Selling General & Admin 345,185 316,667 270,262 36.0% 35.1% 36.6%

Restruct Remediation & Impair 258 1,777 1,567 0.0% 0.2% 0.2%

Other Operating Expense - - - 0.0% 0.0% 0.0%

Total Indirect Operating Costs 345,443 318,444 271,829 36.0% 35.3% 36.8%

Operating Income 156,174 146,567 113,093 16.3% 16.2% 15.3% Improving (2014-2015 increase of 6.555%)

Interest Income 56 21 31 0.0% 0.0% 0.0%

Other Non-Operating Income (1,220) (994) (583) -0.1% -0.1% -0.1%

Total Non-Operating Income (1,164) (973) (552) -0.1% -0.1% -0.1%

Earnings Before Tax 155,010 145,594 112,541 16.1% 16.1% 15.2%

Taxation 56,596 54,851 42,149 5.9% 6.1% 5.7%

Extraordinary Items - - - 0.0% 0.0% 0.0%

Accounting Changes - - - 0.0% 0.0% 0.0%

Net Income 98,414 90,743 70,392 10.3% 10.0% 9.5% Steadily increasing (2014-2015 increase of 8.454%)

Common Size Income Statement

Boston Beer Co Inc (The) (NYS: SAM)

Boston Beer Co., Inc.

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Exhibit 3

Exhibit 4

0.000

0.500

1.000

1.500

2.000

2.500

2015 2014 2013 Industry

Liquidity Ratios

Current

Quick

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

20.000

2015 2014 2013 Industry

Asset Management Ratios

Inventory T/O

Net PPE T/O

Total Asset T/O

Boston Beer Co., Inc.

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Exhibit 5

Exhibit 6

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

2015 2014 2013 Industry

Total Debt-to-Equity

Total Debt-to-Equity

-5.000%

0.000%

5.000%

10.000%

15.000%

20.000%

25.000%

2015 2014 2013 Industry w/ out

outliers

Profitability Ratios: Excluding Outliers

Net Profit Margin %

Operating Margin %

ROA % (Net)

ROE % (Net)

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Equity Analysis

Samuel Adams is an industry leader in craft brews with a history of consistent and steadily

growing returns. Thus, an appropriate level of risk is reflected through their stock. The Beta for Sam

Adams is generally under 1, suggesting the stock is less volatile than the market. Accordingly, the risk for

Sam Adams is lower than market, but so is the potential return. Yahoo Finance values Sam Adams stock

at a .394 Beta [10], Google Finance values the stock at .74 Beta [11], and Reuters also values the stock at

.72 Beta [12]. Given this small sample from three sources, Sam Adams Beta is well below 1, suggesting

the stock bears minimal risk with a moderate return. This data is consistent with reports of Sam Adam’s

stock falling, as a low beta perhaps indicates a currently inflated stock value, but one that has a potential

for growth in the future. Likewise, the standard deviation from the most recent 48-month return is

relatively small at about 9% [13]. The historical price of the stock has been mostly consistent, with only

a moderate amount of monthly losses. Ultimately, the stock bears minimal risk, but in turn offers

minimal to moderate returns.

Consistent with a low beta and low volatility, the default risk for Samuel Adams is likewise

minimal. The default risk, both short and long term, is below industry average. The stock’s sub one Beta

and low standard deviation for the industry suggests that Sam Adam’s stock is low risk, but equally low

reward. Likewise, the nine percent standard deviation in returns suggest the stock in not subject to

dramatic changes; we can expect the stock to maintain its current consistency going forward. Overall,

there is little danger, in the

immediate or long term, of the

company defaulting; we can

therefore assume that Sam

Adams is a relatively low-risk

investment. -0.2

-0.1

0

0.1

0.2

0.3

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

48 month standard deviation

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P/E Ratio

Samuel Adams current P/E ratio is 25.16. Over the past five years, the company’s

average has been 32.53. Its minimum was 16.57 in October of 2011, and its maximum was

52.46 in September of 2013. The industry average is 23.37. As the numbers indicate, the

company’s current P/E ratio is below its company average for the past five years but higher

than the industry average. Therefore, the company is still in good standing. When considering

the P/E ratio, the company’s growth must also be considered. The company is growing at a

steady rate as well as the brewing industry that it is within. Also compared to some of their

major competitors, who serve as benchmarks, Samuel Adams P/E ratio is not as high. Molson

Coors Brewing has a P/E ratio of 49.84 and Craft Brew Alliance has a ratio of 70.75. Therefore,

the numbers indicate that investors are paying more for a $1 of earnings from their competitors

at this time. This may make Samuel Adams’ appear to be undervalued because it is a viable

stock with positive growth expectations in the future. Investors could capitalize by buying now

and getting a worthwhile return in the future. [14]

P/Sales Ratio

Samuel Adams current price to sales ratio is 2.567. Over the past five years the

company’s average has been 3.364. Its minimum was 2.058 in October of 2011, and its

maximum was 5.264 in September of 2013. The industry average is 2.08. Relatively speaking,

Samuel Adams price to sales ratio is lower than one of its major competitors Molson Coors

Brewing, which has a price to sales ratio of 5.014. However, its’ ratio is higher than other

competitors Craft Brew Alliance, who have a ratio of 0.7678 and Mendocino Brewing with a

ratio of 0.1266. The P/S ratio, which indicates how much every dollar of a company’s sales is

Boston Beer Co., Inc.

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valued, further shows that Samuel Adams is a viable stock option. The company has a low ratio

of 2.567, which is attractive to investors because lower ratios are favored regarding the P/S

ratio. This fact becomes even more compounded by the company’s high relative strength in the

previous year. They are one of the most profitable in their industry and one of the market share

leaders. Furthermore, the overall industry’s P/S ratio is only fairly low at 2.08, which makes it

attractive overall to investors. [15]

EV/EBITDA Ratio

Samuel Adams EV/EBITDA current ratio is 11.6. Over the past 10 years the company’s

average has been 13. Its minimum was 6.9 and the maximum was 25.4. The company is

performing below the industry average which is 13.21. The company’s EV/EBITDA is also lower

than both of its biggest competitors. Molson Coors Brewing’s ratio is 30.14 and Craft Brew

Alliance Inc.’s is 12.22. As a measure of the fair market value of a company, Samuel Adams

EV/EBITDA ratio is not as high as some of their competitors. However, this does not suggest

that their worth is not valuable just not as high as others in their industry at this time. As a

competent company, this works in their favor because it makes them appear to be undervalued

in many ways. Investors are aware of their consistent strong performance within their industry

and would like to partake in the future earnings as the company continues to grow as well as

their industry. [16]

Projected Earnings

According to data provided by Zack’s Investment Research, the projected earnings

expectation for Samuel Adams over the next five years is an optimistic prediction for the most

part. The company’s expected earnings growth for December 2016 is an increase of 8.09% and

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8.51% for December 2017. The growth rate is projected as 3.84% for December 2018 and no

growth is projected to take place in December 2019 and 2020. The projected earnings

expectations validity heavily depends on how Samuel Adams’ respond to the changes in the

marketplace. [17]

Growth Rate

Samuel Adams’ sustainable growth rate in the future depends on how well they

overcome the challenges that have arisen within their industry. Competition is intensifying due

to many new entrants and the expansion of current competitors into new regional markets.

There has also been a decline in the softer cider category in the brewing industry, in which

Samuel Adams’ targets as well. The company plans to overcome these issues by revamping

their brand by investing into more effective marketing campaigns. They also plan to increase

their selling expenses to be more aggressive in their market, and they are considering new

technology that will make their operations more efficient. If the company successfully

implements these plans, they will maintain their position as one of the top companies in their

industry and establish a sustainable growth rate that will hold firm. [18]

Stock Prices

Reasonable stock prices for Samuel Adams’ in the future range between $182.29 –

222.36. With the current stock price as the base and the projected earnings growth

expectations applied, the prices per year follow reasonable price ranges for stock: 197.06

(2016), 213.81 (2017), 222.36 (2018). As stated above, there is no earnings growth projected

for neither 2019 nor 2020.

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Recommendations

Message from the CEO

Mr. Roper went on to say, "Our primary focus in 2016 will be on innovating within the Samuel

Adams family, … promotions and media for all of our brands, and prioritizing the core styles of Angry

Orchard, Twisted Tea, Traveler and Coney Island Hard Root Beer for increased distribution and

promotion. We are increasing investments … so we can maintain the pace of innovation and also be

positioned to react quickly to any opportunities that emerge. We are taking steps to ensure that our

investment dollars are well spent. We continue to evaluate all our spending, so as to allocate it to the

activities which are most likely to support growth." [9]

Our Recommendation

Based on our financial analysis of the Boston Beer Co., Inc., we deem the stock a strong buy,

using the projected growth and financial strength as the basis of our decision. Their executive team

further adds a value to the company, while their vision and drive for innovation through Research &

Development spending highlights the goals of the future prospects of the company.

Although a slightly over-priced stock, Boston Beer Co.’s position as a craft brewery operating on

a large scale capitalizes on the shift from non-craft breweries (such as Anheuser Busch InBev) to craft

breweries (12.8% increase in sales in the past year [4]). That suggests Boston Beer Co. will hold its

position as an industry leader in the craft beer industry.

Overall, we believe Boston Beer Co. will continue to experience growth going forward and

maintain healthy returns. Now is the time to buy into the craft beer industry, and we recommend

Boston Beer Co. stock as solid foundation on which to enter the industry.

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Sources

[1] https://www.samueladams.com/history

[2] https://www.samueladams.com/culture

[3] http://www.beerinstitute.org/assets/uploads/general-upload/BEER-5057-AR-2014_web.pdf

[4] https://www.brewersassociation.org/statistics/national-beer-sales-production-data/

[5] http://www.chicagotribune.com/bluesky/hub/chi-inc-samuel-adams-jim-koch-bsi-hub-ngux-

story.html

[6] http://www.hoovers.com/company-information/cs/company-

profile.the_boston_beer_company_inc.dfe677b5d3dc3a05.html

[7] http://www.hoovers.com/company-information/cs/sales-preparation.anheuser-busch_inbev_sa-

nv.71b44227aac9f85d.html

[8] http://www.alchemyandscience.com/about/

[9] http://www.bostonbeer.com/phoenix.zhtml?c=69432&p=irol-subsidiary-brands

[10] http://finance.yahoo.com/q?s=SAM&fr=uh3_finance_web&uhb=uhb2

[11] https://www.google.com/finance?q=NYSE%3ASAM&ei=uaEfV_mKGZCfee72g9AK

[12] http://www.reuters.com/finance/stocks/overview?symbol=SAM.N

[14] https://ycharts.com/companies/SAM/pe_ratio

[15] https://ycharts.com/companies/SAM/ps_ratio

[16] http://www.zacks.com/stock/news/207486/boston-beer-sam-q4-earnings-competition-to-hurt-

again

[17] https://ycharts.com/companies/SAM

[18] http://www.nasdaq.com/symbol/sam/earnings-growth

Data 1 – chart taken from the Beer Serves America – The Beer Industry – Economic Contribution Study

(prepared for Beer Institute by John Dunham & Associates), July 2015