Duke Investment Club Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas Kottamasu, Sachin Mitra, Tim Evans Boston Beer Co. (SAM) 1
Investment Thesis Recommendation: SELL Current Share Price: $159.87 (as of close 4/2/2013) 2014 target: $131.00 (19.8% upside to short) Boston Beer Co. s share price doesn t reflect the following headwinds: 1. SAM s nonexistent exposure to growth markets 2. Increased competition in the craft beer space 3. Questionable recent share price movements Current Dividend: 0% Zhou Fang 2
Company Background Largest craft brewer in the U.S. Approx. 1% of overall market Over 50 beers under the Samuel Adams / Sam Adams brand names Twisted Tea flavored malt beverages Angry Orchard hard cider brands Above brands <1% of sales 97% of sales in North America Family company Cofounder and Chairman Jim Koch Family owns ~30% of Class A shares and 100% of Class B Shares Controls 5/8 board seats Austin Lu 3
1,000 hl +/- % ann. growth CAGR Market Growth Trends Global Beer Production & Growth 600,000 500,000 400,000 Data: Brewers Almanac 12.0% 7.0% 5 4 3 Forecasted 2012-2016 Volume CAGR by Region 300,000 2.0% 2 1 200,000 0-3.0% -1 100,000-2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 North America Asia USA China -8.0% Volume % Growth Source: Canadean, SABMiller Austin Lu 4
Where is the growth? Austin Lu 5
Industry Breakdown Vikas Kottamasu 6
Major Brewers Encroach Tim Evans 7
Craft Beer Industry Key Points: 2012: Craft 15%, Overall Beer Market 1% 2012: Number of breweries increased 18% 6.5% share of the beer market by volume SAM comprises ~22% Zhou Fang 8
Increasing Competition Number of Breweries in U.S.: 420 (2006) +3600 Zhou Fang 9
Competition: Wine and Spirits Zhou Fang 10
Beer Loses Market Share Zhou Fang 11
Fast Growing Competition Key Points: SAM is not among top 10 5 of 10 are pure craft Other 5 are BUD Tim Evans 12
BEER Act Key Points: Legislates definition of small brewer: Under 6 million barrels per year (Previously 2 million) Cuts excise tax from $7 a barrel to $3.50 Cuts tax of $18 per barrel to $16 for small brewers Strongly opposed by large breweries Zhou Fang 13
SAM-Specific News Key Points: Invention of Sam Can Giving it away for free Freshest Beer Program 12/12/2012 Call: Timing of certain SG&A expenses Twisted Tea hits the market 2/19/2013 Q42012 Call Can announcement Vikas Kottamasu 14
Implications - Industry How do overall beer market trends impact SAM? Zero exposure to fastest growing markets Competitors are far-better positioned to ride these trends Target market consumer preferences are shifting to wine and spirits Major breweries are aggressively entering the craft space Shock Top grew 116% in 2011 SAM likely will lose market share in an already small segment Craft Everything else There are thousands of breweries competing for this slice! Tim Evans 15
Implications Craft How do craft beer market trends impact SAM? Massive increase in competition severely threatens sustainable growth rates Fierce loyalty to regional brands Low barriers to entry for craft breweries Costco vs. Sam s Quik Shop Analogy Tim Evans 16
Implications News How do recent company-specific news items impact SAM? For Chairman Jim Koch, is Boston Beer Co. a hobby or a business? Cans, hops noble or competitive? Cans vs. Bottles Who gets the shelf space? Cannibalization Koch s Promise (2005 Drinker s Bill of Rights ) Sam Adams will never be put in cans Freshest Beer Threats to inventory / supply Tim Evans 17
SWOT Analysis Strengths Largest craft brewer Led craft revolution Experienced high growth Opportunities Part of growing market Non-beer brands International expansion Weaknesses Zero exposure to growth markets Limited economies of scale Difficulty balancing craft tradition with business expansion Threats Shifting consumer preferences Explosive emergence of new breweries Major players entering craft market Austin Lu 18
Share Performance Dec 12, 2012: SAM raised its FY12 EPS estimate due to increased shipment volumes and the timing of certain SG&A expenses SAM Share Price: Current: $159.87 52wk Range: 97.47-164.52 Short % of Float = 24.2% Seamus FitzPatrick 19
Share Performance 50% more valuable company since November, given these headwinds? Seamus FitzPatrick 20
EBIT Margin Growth (yoy) Growth and Margins Key Points: 16.00% 14.00% Revenue Growth Craft Beer market growth accounts for SAM s revenue growth 12.00% 10.00% 8.00% 6.00% 4.00% SAM BUD TAP SAM has lower gross margins, operating margins, and EBIT margins than BUD 2.00% 0.00% 2011 2012 2013 2014 2015 EBIT Margin 40.0% Price Competition: ABInbev: Shock Top etc. MolsonCoors: Blue Moon Multitude of pure craft 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2011 2012 2013 2014 2015 SAM BUD TAP Seamus FitzPatrick 21
Price/Earnings Seamus FitzPatrick 22
Relative Valuation Seamus FitzPatrick 23
DCF Assumptions Growth Assumptions Revenue Growth (Annual) 14 (+.1)% COGS Growth (Annual) 45 (+.2)% Terminal Growth Rate 3% WACC Assumptions WACC 9.1% Beta 0.84 Risk- Free Rate 1.85% Growth Period 10 years Market Risk Premium 8.6% Perpetuity Growth Model WACC 9.1% NPV of FCF $573.8 Terminal Growth Rate 3.0% Terminal Value $2,869.4 NPV of Terminal Value $1,201.0 Enterprise (Equity) Value $1,774.9 Shares Outstanding 13.400 Equity Value / Share $132.45 (20% downside) Sensitivity Analysis WACC 8.10% 8.60% 9.10% 9.60% 10.10% 2.00% $142.63 $129.93 $119.08 $109.70 $101.53 Terminal 2.50% $151.83 $137.42 $125.26 $114.85 $105.86 growth 3.00% $162.85 $146.26 $132.45 $120.78 $110.80 rate 3.50% $176.26 $156.82 $140.92 $127.68 $116.49 4.00% $192.94 $169.69 $151.06 $135.82 $123.12 Vikas Kottamasu 24
Intrinsic Valuation Base Case Target: $132.45 Assumptions Bull Expected Bear Growth Rate: 15(+.2)% 14(+.1)% 13.00% WACC: 9.10% 9.10% 9.10% Terminal Rate: 3.00% 3.00% 3.00% Zhou Fang 25
Risks to Thesis Main Risks: Craft beer industry continues it s incredible growth Long-Short: BUD Consolidation in Industry Acquisition Target? Unlikely family wants to sell out Austin Lu 26
Conclusion Recommendation: SELL Current Share Price: $159.87 (as of close 4/2/2013) 2014 target: $131.00 (19.8% upside to short) Boston Beer Co. s share price doesn t reflect the following headwinds: 1. SAM s nonexistent exposure to growth markets 2. Increased competition in the craft beer space 3. Questionable recent share price movements Current Dividend: 0% Vikas Kottamasu 27
Questions? 28
Appendix - Comps Boston Beer Company, Inc., The (SAM) Company Share Price Ticker (US$) (US$) Share Price Market 52 Cap Week High (US$m Revenue Growth Rate (%) Gross Margin EBIT Margin Debt/E quity Ratio EV/EBITDA Price / Earnings PEG m) TTM 2013E 2014E TTM 2013E 2014E TTM 2013E 2014E TTM FY1 FY2 2014E 160,04 0 1.8% 5.7% 6.3% 58.6 59.2 60.2 33.8 33.2 35.0 107.78 40.7 11.7 21.9 20.9 18.4 2.5 0.84 AB Inbev BUD 98.44 96.9% Molson Coors Brewing Company TAP 51.36 97.0% 9,257 11.4% 13.7% 3.0% 39.9 36.8 37.0 25.7 23.6 24.4 58.59 12.7 9.7 20.9 12.7 11.9 2.8 0.78 Craft Brew Alliance, Inc. BREW 7.46 83.6% 139 12.2% 9.8% - 29.9 - - 5.0 10.0-12.31 7.7 8.2 56.7 27.3 25.0-0.87 SABMiller PLC SAB 12.4% 29.2% 6.3% 47.7 56.0 56.2 30.9 22.8 24.0 73.58 38 10.9 20.0 22.2 19.7 2.0 1.01 Heineken HEIA 7.4% 11.6% 4.5% 43.3 40.9 42.7 21.6 15.6 16.3 114.27 28.5 10.4 11.6 18.4 16.4 1.8 0.67 Mean 52.42 92.5% 56,479 9.0% 14.0% 5.0% 43.9 48.2 49.0 23.4 21.0 24.9 73.31 25.5 10.2 26.2 20.3 18.3 2.3 0.83 Median 51.36 96.9% 9,257 11.4% 11.6% 5.4% 43.3 48.5 49.5 25.7 22.8 24.2 73.58 28.5 10.4 20.9 20.9 18.4 2.3 0.84 160,04 High 98.44 97.0% 0 12.4% 29.2% 6.3% 58.6 59.2 60.2 33.8 33.2 35.0 114.27 40.7 11.7 56.7 27.3 25.0 2.8 1.01 Low 7.46 83.6% 139 1.8% 5.7% 3.0% 29.9 36.8 37.0 5.0 10.0 16.3 12.31 7.7 8.2 11.6 12.7 11.9 1.8 0.67 Boston Beer Company, Inc., The SAM 156.00 94.8% 2,014 13.1% 13.6% 10.5% 54.3 53.9 54.4 16.5 16.2 16.6 0.26-15 35.7 31.4 27.5 2.6 0.82 TTM FY1 Beta 29
Appendix - DCF 30