Case 7 – The Boston Beer Company Inc.

Dillon Martin, Colton Nelson, Jimmy Beers, Sam Kennemur

Find the value of Boston Beer Company based on its projected future cash flows. Explain the
process you used to arrive at the number. Make sure to highlight all necessary assumptions and
comment on any potential problems with these assumptions (focus on the most important
assumptions).

We valued Boston Beer Company (SAM) based on project future cash flows utilizing a
discounted cash flow model. We calculated revenue based on a three stage growth model over
our five year forecast period. We estimate a steady tapering of growth to analyst’s forecast of 5%
by year 2000 (from 19.1% in FY95). We calculated a weighted average cost of capital of 8.64%
used over the forecast period and a 4-yr. average effective tax rate of 42.00%. We estimated a
terminal sales growth of 3%, arriving at an intrinsic value of $4.75 per share. Unfortunately
growth estimates can be somewhat arbitrary, therefore these assumptions could vary from our
estimates, which could have major implications on fair value. Additionally, any percentage of
sales averages that were used to forecast being off from guidance could also have a material
effect on our IPO price as well.

(b) Find the value of Boston Beer Company based on comparisons to other companies. Explain
the process you used to arrive at the number. Make sure to highlight all necessary assumptions
and comment on any potential problems with these assumptions (focus on the most important
assumptions).

We estimated the value of SAM by comparables, using the Price to Earnings and Price to Book
of comparable brewing companies. We valued SAM by taking the median P/E & P/B of the
comparables group (Pete's Brewing Company and Redhook Ale Brewery) and multiplying them
by the earnings per share and book value per share of SAM. Using equal weights of a P/E & P/B
multiple valuations, our comps analysis implied a $62.15 share price. The main issue with the
assumptions in our relative valuation is the small sample size of a comparables group. Given our
group contains only two companies, the median of the P/E & P/B is drastically different than
both firms, so in terms of valuation, assuming the fair multiple to value SAM at may not be the
median multiple. Instead, it would be critical to know the capital structure and size of both
companies to determine if the multiples used should lean towards the more similar firm.
However, the main solution to this issue would be to increase the size of the comparables group
and eliminate any doubt of a fair median valuation multiple.

(c) Based on the two numbers in parts (a) and (b) above and any other considerations, determine
the IPO price that should be set by the company (and its investment banks)? Justify your choice.

We determined SAM should IPO for $33.45. Our valuation is weighted equally between our
DCF and Comps analysis. We determined this to be a fair valuation considering the market's
reaction to both Pete’s and Redhook’s IPO. Realistically our IPO recommendation is
significantly higher than the actual IPO of $15, which may be unfavorable for banks with some
skin in the game. Banks typically underprice IPOs to profit and to give their large clients an
opportunity to profit by purchasing shares from them. Our recommended IPO price would ensure
SAM doesn’t leave money on the table.

(d) Do you think that the craft beer industry as a whole is priced appropriately by the market?
What, if any, factors can lead to valuations being “wrong” for an entire industry

According to the case study, the craft beer segment made up roughly 5% of total domestic beer
sales in 2000, with some estimations reaching as high as 10%. Some states out perform others,
meaning craft beer sells better in different geographic locations. The overall concept of brand
marketing plays a key factor in determining whether or not a company’s product does well in
comparison with others. In regards to how the industry is priced as a whole, the argument could
be made from both sides on whether it is fairly priced. One could say that because the craft beer
industry is seen as more “trendy” with key segments, sentiment could lead to incorrects
valuations. If markets are relatively efficient, we believe the intrinsic value of the industry to be
higher than initial offerings. It is not surprising banks underpriced these IPOs, therefore our
target IPO greater than the actual is substantiated given the run up in price after the initial
offering. The major factors for valuations being wrong for an industry, or in this case, for these
three companies is an inadequate comparables group. The comparables group of only 2
companies is a small sample size to value another firm, and when looking at the respective
multiples for these two companies, there is a huge variation between them. Therefore, inadequate
comparables group could lead to overvaluations, a larger group would be more reliable in pulling
a relative valuation.