BOSTON BEER COMPANY, INC.

Case Study Analysis

Background
The Boston Beer Company, Inc., incorporated on August 17, 1995, is a craft brewer in the United States
and founded by Jim Kotch with the hopes of challenging the status quo in the American beer industry. The
Company is engaged in the business of producing and selling alcohol beverages primarily in the domestic
market and in selected international markets. The Company operates through two segments: Boston Beer
Company segment, and A&S Brewing Collaborative segment. Some of the Major brands of Boston Beer
Company are Samuel Adams, Twisted Tea, Angry Orchard etc.
The Company produces malt beverages and hard cider at the Company-owned breweries and under contract
arrangements at other brewery locations. Products are available predominantly in the United States, but
also has markets in Canada, Europe, Israel, Australia, New Zealand, the Caribbean, the Pacific Rim,
Mexico, and Central and South America.
Key Findings
Companies in breweries industry produce beer, ale, malt liquor, and nonalcoholic beer. Craft breweries
have gained more market share in recent years by introducing a variety of new products and tastes that sell
at higher price to make huge profit. The major beer makers have acquired popular craft brands into a limit
competition from the fast-growing sector and they also get benefits from regulatory changes in some areas,
which make it easier to self-distribute directly to retailers without selling though wholesalers. For the large
breweries brands, they dominate the global beer market, and compete with wineries and other
manufacturers of alcoholic and non-alcoholic beverages. The two categories of beer are ales and lagers, it
differed from yeast types and brewing temperatures. The most popular beer style in the United States is a
light-bodied beer with moderate alcohol level by nontraditional grains such as rice and corn. Food,
beverages and tobacco products takes for about 15% of the United States manufacturing revenues, which
implies the alcoholic beverages still have a brighter developing space than any other industries.
There are lots of competitors within the beer industry, the top 3 competitors of Boston Beer Company are
Heineken N.V., Anheuser-Busch InBev NV and Millercoors LLC. The companies have similar structure
with Boston Beer Company are A&S Brewing Collaborative LLC, American Craft Brewery LLC and BBC
Keg Company, LLC. For beer industry, customers’ demands ultimately decide the consuming level. The
profitability of individual companies depends on effective productivities and distribution tunnel. Big
competitors in the market such as Heineken N.V., they have a larger economic scale in purchasing power,
production and marketing strategies. Small breweries companies more rely on the differentiate strategy by
specializing their products to take market share.
The trends for Boston Beer Company is positive slow growth in the next few years. Based on the income
statement in 2016 of their revenues, they were receiving a net income of $87.25 million dollars, which is
slightly lower than the new income they have in year 2015.

Implications of Findings
With the trends of income statement in Boston Beer Company that they sales consistently grow from 2012
to 2015 and starts to grow and drop a little bit of sales due to large competitors with their differentiated
market strategy in the beer industry. However, we believe that Boston Beer Company will keep growing in
the next couple years in a slower way since they have taken the biggest market share during last decades’
economic environment. However, dividend growth rate of Boston Beer Company is increasing every which
is making the company more attractive to the investors.
Valuation of BBC
IPO Valuation: To determine the appropriate value of the Boston Beer Co. Inc., we used financial
information from the market competitors Redhook and Pete’s. Both the companies have operational
similarities like BBC.

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Below is some stock price information for Pete’s brewing Company and Redhook Ale Brewery-
Title Pete’s Brewing Company Redhook Ale Brewery
Offering Price $18 $17
Date of Offering November 7, 1995 August 17, 1995
1st Day Close $25.25 &27
Stock Price Close on $24.75 $27
11/20/95
P/E Ratio on 11/20/95 100 36

We used P/E Ratio analysis to find the BBC’s IPO value.

P/E= Price per share/ EPS

In 1995 BBC’s EPS= 0.26 (till September ‘95)

EPS (Yearly)= 0.26*(12/9) = 0.347

Hence, Pete’s P= 100*0.347= $34.70 [as, P/ E= 100x]

And, Redhook’s P= 36*0.347= $ 12.492 [as, P/ E= 36x]

So, the value of BBC stock should be in the range of $12.492 - $34.70.

1st Day Close: To calculate the estimated closing price of BBC’s stock we again took data from Pete’s and
Redhook’s financial statements.

Title Pete’s Redhook

1st Day Premium* 40.28% 58.82%

*Premium= (Closing Price- Offering Price)/ Offering Price

Hence, BBC’s premium should be in between 40% and 60%.
Appropriate price range= $(12.492*1.6) - $(34.70*1.40)
= $20 - $49 (Approx.)

Stock Price after the 30th Day: We used the same approach as 1st day close price to find the estimated
stock price of BBC after the 30th day.
30 days return of Redhook= 16.67%
13 days return of Pete’s= 37.50%
Thus, considering all the brewing companies doing business in the same market condition, BBC’s stock
price might increase by 17% - 35%
Price range would be= $(12.492*1.17) – $(34.70*1.38)
= $15 - $48 (Approx.)

Prognostication:

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According to the P/E ratios, Pete's is overvalued compared to Redhook Ale Brewery. Because BBC had not
gone public, we can only estimate what the P/E of BBC would have been. Using the estimated stock price
on the closing day and the estimated EPS of 0.3467, we can attempt to estimate what the P/E ratio of BBC
would have been. $15/.3467 is a P/E of 43.27. This is the low end approx. of what the P/E might have been.
On the high end, the P/E would have been $48/.3467. This is a P/E of approx. 138.

The Average Price Earnings Ratio at the time was 68 with an Earnings Per Share of $0.26 and a Value Per
Share of $17.68.

It is hard to guess whether BBC's stock was undervalued or overvalued compared to the other companies.
Our best guess is based upon the range the P/E would have been overvalued compared to Redhook Ale
Brewery and undervalued according to Pete's. The price range aligns with the prices of the other beer
companies and the average would have been $31.50 for the price of the closing stock. The average places
the P/E rate at 9.85. ($31.50/.3467). This is above the average price per earnings ratio of 68, below the P/E
of Pete’s and above Redhook's P/E of 36.

On page 5 of the case study, it is stated that the craft brewing segment of the beer industry had been growing
by approximately 40% per year over the last 5 years. It is also stated that the craft brewing segment
comprised 1.4% of the beer industry in 1994. And on page 6 of the report it is conservatively estimated that
the craft brewing segment could reach 5% of the beer industry by 2000, and perhaps as high as 7% to 10%,
based on existing percent shares in several US states.

If the craft brewing segment grows from 1.4% of the market in 1995 to 5% in 2000, we can estimate what
that growth rate, g, would be:

(1+g)^5 * 1.4 = 5
5/1.4 = (1+g)^5
(5/1.4)^(1/5) = 1+g
(5/1.4)^(1/5) - 1 = g
g = 28.99% annualized growth rate

So, a conservative estimate would result in about 29% growth per year between 1995 and 2000. Let's see
what a more bullish estimate would result in next, by plugging in 10% segment share for the year 2000:

(1+g)^5 * 1.4 = 10
10/1.4 = (1+g)^5
(10/1.4)^(1/5) = 1+g
(10/1.4)^(1/5) - 1 = g
g = 48.17% annualized growth rate

This gives us a target range of 29% to 48%. So, the 40% growth rates may have indeed been sustainable,
up until the year 2000.

ROE = return on equity = Net income / shareholder equity

On page 11 of the report, it is stated: "Annualized ROEs were 129.3% and 8.6% for Pete’s Brewing and
Redhook, respectively."

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Since the companies had been growing at approximately 40% per year over the last 5 years, and we were
able to estimate a 29% to 48% growth rate for the next 5 years based on estimates of craft brewing segment
growth, it is likely these annualized ROEs would prove to be sustainable.

Summary:
For Boston Beer Company, it is important that they make more differentiated craft brewing products to
have more market share. The growth rate for craft brewing beer industry might be larger than normal beers
since its high quality that Boston Beer Company provided. The industry needs more craft brewing beer
companies to re-position their market strategy.

References:

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1. https://www.bostonbeer.com/overview
2. https://www.investopedia.com/terms/r/returnonequity.asp
3. http://www.hoovers.com/company-information/cs/company-
profile.the_boston_beer_company_inc.dfe677b5d3dc3a05.html#industry-info
4. https://www.bevindustry.com/2017-beer-market-report