the brewing industry at a glance

A C C 6 1 5 P r o f e s s o r P a u l G l o t z b e c k e r

The Brewing Industry at a Glance The Boston Beer Company vs. Craft Brew Alliance By Jaime Evans, Doriana Rossi, Jensy Sanchez, Caleb Barton, William Montanez & Collin Murray

Fall 14

08 Fall

2

The Brewing Industry At A Glance

The Boston Beer Co. [TICKER: SAM]

VS Craft Brew Alliance [TICKER: BREW]

By Jaime Evans

Doriana Rossi Jensy Sanchez Caleb Barton

William Montanez Collin Murray

3

Table of Content Brewing Industry: Boston Beer Company, Inc. ........................................................................................... 4

Economic Attributes Framework ................................................................................................................. 5

Economic Attributes: Demand ..................................................................................................................... 6

Economic Attributes: Supply ....................................................................................................................... 7

Economic Attributes: Manufacturing ........................................................................................................... 8

Economic Attributes: Marketing .................................................................................................................. 9

Economic Attributes: Investing & Financing ............................................................................................ 10

Company Strategies ................................................................................................................................... 11

Restatement of the Financial Statement ..................................................................................................... 12

Inventory Restatement ............................................................................................................................... 12

Depreciation Restatement .......................................................................................................................... 13

Leases Restatement .................................................................................................................................... 13

Profitability Analysis ................................................................................................................................. 15

Profitability Ratios ..................................................................................................................................... 17

Turnover Ratios/Factors ............................................................................................................................ 19

Risk Analysis ............................................................................................................................................. 21

Liquidity (Short-term) Risk ....................................................................................................................... 21

Solvency (Long-term) Risk ....................................................................................................................... 23

Activity Ratios ........................................................................................................................................... 25

Financial Statement Performance Analysis ............................................................................................... 27

Financial Statement Projections ................................................................................................................. 27

Income Statement Boston Beer Company .............................................................................................. 27

Income Statement Craft Brew Alliance .................................................................................................. 31

Balance Sheet Boston Beer ..................................................................................................................... 32

Balance Sheet Craft Brew Alliance ........................................................................................................ 34

Valuation Analysis ..................................................................................................................................... 36

Conclusion ................................................................................................................................................. 38

Bibliography .............................................................................................................................................. 40

Appendix A Restated Financial Statements ............................................................................................ 41

Appendix B Ratios .................................................................................................................................. 43

Appendix C Projected Financial Statements ........................................................................................... 44

Appendix D Valuation ............................................................................................................................ 50

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Brewing Industry: Boston Beer Company, Inc. Industry analysis is the essential first step in the valuation of a company. Without

establishing an underlying understanding of the scope in which a company operates, proper

evaluation of the company is impossible. With this in mind, the process of analyzing the

performances of Boston Beer Company (SAM) and Craft Brew Alliance (BREW) will begin

with the Economic Attributes Framework industry analysis of the brewing industry. Special

consideration will be given to the craft brew segment, and specific observations concerning each

companys attribute.

The United States beer industry is partitioned into three tiers breweries,

distributors/wholesalers, and retailors. This structure was mandated following the repeal of

prohibition, to ensure that breweries, the producers of the product, would not gain an excess of

power. Wholesalers buy the product from the producers and sell them to the retailors the party

that resells the product to the consumers. Craft brewers, according to the Brewers Association,

are breweries that are small, independent, and traditional. The Brewers Association lists

guidelines that are specific to each of the three characteristics: annual production of under 6

million barrels (small), less than 25% of the company is owned by an alcoholic beverage

industry member that is not itself (independent), and it makes mostly beer whose flavor derives

from traditional or innovative brewing ingredients and their fermentation (traditional). By this

definition, Craft Beer Alliance is technically not a craft beer brewer due to the percentage stake

owned by Anheuser-Busch InBev (A-B) which will be discussed later. However, it is

important to realize that for purposes of being an active competitor in the craft beer industry,

these technicalities are irrelevant. There has been a shift in consumer concern away from the

technical definition towards the application of the term craft beer to any products whose

characteristics would cause it to be perceived as such. Because Craft Beer Alliances products

certainly pertain to this concept, and because the company readily competes with other

companies in the craft beer industry, it will be referred to as such for the remainder of this

analysis, despite its technical disqualification.

General market trends show that beer has been losing market share to wine and spirits for

over a decade. Despite this, looking at changes across the entire alcoholic beverage scope,

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premium/ luxury priced beer is regaining favor with the consumer, deeming craft, import, and

super premium beer an affordable luxury. Craft beer is projected to represent nearly 15% of the

beer industry by 2020 at current growth rate. The growth rate is driven by current beer drinkers

consuming more craft beer, and to consumers of other beverages switching to craft beer. It is

safe to predict that increasing trends in the brewery industry and the craft beer segment will

continue into the future.

Economic Attributes Framework Established in 1984, the Boston Beer Company has become one of the largest, most

respected craft brewers in the United States, with a 19.3% market share in the industry. When

the Companys signature product line, Samuel Adams Boston Lager was first created, the

demand for micro-brewed (craft) beers was practically non-existent, and it took several years for

the Company to build a loyal customer base. Nonetheless, during its 30 years of operations, the

Company has been able to uphold and maintain its strategy of producing high quality alcoholic

beverages, as well as adapting to the ever-changing tastes and preferences of consumers, by

constantly brewing new flavors and acquiring complementary brands like Angry Orchard hard

cider and Twisted Tea.

Craft Brew Alliance was formed in 2008 from the merger of two leading Pacific

Northwest craft brewers Widmer Brothers Brewing and Redhook Ale Brewery. Two years

later, Kona Brewing Company, the largest craft brewery in Hawaii, joined the team as well.

While it is newer and operates on a smaller level than Boston Beer Company, Craft Brew

Alliance has quickly proven its worth. Omission Beer, internally developed only two years after

the last company merging, is the first beer brand specially crafted to remove gluten. The gluten

free market was valued at $4.2 billion in 2012 and is projected to reach $15.6 billion by 2015.

The company has a portfolio of five unique and pioneering beer and cider brands. It creates

customer satisfaction through the brewing, marketing, and selling of its high quality award-

winning craft beers. Craft Beer Alliance is a family rooted in passion, creativity and uniqueness

with a shared conviction: Craft Brew Alliance will continue to push the envelope in the ever-

changing craft beer industry.

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Economic Attributes: Demand As explained earlier, demand for craft beer has increased dramatically. Craft beer

industry growth continues at double-digit rates, which has been a trend since 2008. Consumers

are not highly price-sensitive when it comes to high quality beer; demand is based more on

shifting consumer preferences, even though beverages categorized under Better Beers tend to

be more expensive due to better quality and more complex taste. Studies are showing that

consumers are looking to drink less, but better, and that they are seeking variety. They are

willing to pay extra for better quality beer, however even when going out to a bar or restaurant, a

pint of craft beer is typically cheaper than a glass of wine or a mixed drink in comparison.

Demand is insensitive to business cycles; despite the recession, the brewing industry has

grown immensely over the past five years due to the buy local movement and the shift of

consuming alcoholic beverages at home versus going out. This gives a competitive advantage to

companies like the Boston Beer Company, Craft Brew Alliance, and other small breweries that

may not have contracts with restaurants to sell their products but instead have contracts with

grocery stores, wine/liquor stores, and convenience stores where there is available shelf space.

Demand is, for the most part, independent of seasonal effects. This is surprising because Boston

Beer Company releases a variety of seasonal flavors under its Sam Adams brand, and similarly,

Craft Brew Alliance offers a Summer Variety Pack and Winter Variety Pack.

Craft Beer Alliances sales do reflect a slight degree of seasonality when comparing

quarters, but it has been concluded that results for any particular quarter are not likely to be

indicative of the results to be achieved for the full year. Also, the minor seasonality effect could

be occurring because the seasonal variety packs were very recently introduced in just 2012 and

2013, and it is likely the occurrence will smooth out.

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Economic Attributes: Supply In terms of suppliers, the craft beer industry is growing increasingly competitive due to

the rising number and diversity of craft brewers, including contract brewers. Secondly, more

large national domestic brewers have been acquired by or merged with other national domestic

and foreign brewers, creating a more difficult environment to compete in. In 2013, according to

industry sources, A-B and MillerCoors accounted for more than 74% of total beer shipped in the

U.S., excluding imports. In addition, A-B and MillerCoors have invested in existing smaller

craft breweries and created separate craft-focused divisions in an effort to capitalize on the

growing craft beer segment.

The Boston Beer Company is beginning to face substantial competition due to the

massive boom in the brewing industry, and also due to the large and growing number of craft

brewers with similar pricing and target drinkers. However, the company has a significant

competitive advantage due to the popularity of its branded products like Samuel Adams Boston

Lager, and its expansion into new distribution channels. In 2013, the Company launched the

Sam Can, which is its signature Samuel Adams served in a special can that preserves and

slightly enhances the drinking experience. This was a huge success because it opened a new

channel of venues where glass bottles are prohibited, such as: beaches, golf clubs, sports and

concert venues. The Company has offered to license the use of the specially engineered can to

other craft brewers on a royalty-free basis (Letter to the Shareholders).

Craft Brew Alliance has created its own methods to cope with high levels of competition

in the brewery industry. Craft Brew Alliance is the only independent craft brewer in the U.S. to

establish a wholly aligned distribution network through its partnership with A-B. The

partnership provides the company access to national distribution in all 50 states, which results in

a highly effective distribution presence in each market and administrative efficiencies. Even

though many competitors distribute nationally and have greater financial resources, partnership

with A-B has put the company on the same playing field, without having to come up with the

resources on its own. Additionally, Craft Brew Alliance uniquely acts as its own retail for a

portion of its products. They provide an opportunity to continually experiment with new

varieties of hops and malts in all styles of beer on a market in test-size batches. This allows the

company to evaluate its strengths prior to releasing them on a national level.

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There are low barriers to entry in the brewing industry, and increased market acceptance

has made the industry attractive for new businesses. Craft brewing has gained enormous

popularity over the last several years, but the Boston Beer Company has remained the largest

brewer of Better Beer in the industry, with competition coming from Craft Brew Alliance and

other emerging breweries. The Boston Beer Company has several strengths that contribute to its

success of being the primary supplier of craft beer in the country: the Company has won several

awards for its products, including 442 awards and honors, and Samuel Adams Boston Lager won

a gold medal at the European Beer Star Competition (one of the most significant beer

competitions in the world) in 2013, alone; its distribution capabilities pose a significant

competitive advantage especially due to its connections with international markets (Canada,

Israel, Europe, Mexico, Central and South America) and its ability to distribute its products on a

more cost-effective bases, and the companys scale is much larger than its competitors like Sierra

Nevada, Dogfish Head, and New Belgium Brewing Company.

Craft Brew Alliance has some advantages for being a newer entrant in the market. As

discussed, the craft beer industry has grown as a market segment and is projected to continue to

grow, and the newer entrant is uniquely positioned to take advantage of segment growth and new

opportunities. It is also important to note that even though Craft Brew Alliance is a fairly young

company, its leadership team, along with the three companies that merged to form it, actually

have 100+ years of beer and growth-company expertise.

Economic Attributes: Manufacturing This industry is mostly capital-intensive. The establishment of a brewery requires a

substantial amount of capital in the form of equipment, plants, stills, filtration systems, and

bottling lines which require repairs and maintenance year-round. The majority of the production

process is completed using automated brewing machinery; therefore, a significant amount of

labor is not needed. Craft Brew Alliance uses this equipment at four of its production breweries,

but has manual brewpub-style brewing systems in place at its two smallest breweries; these

require a labor component.

The bottling and distribution of the product is especially capital-intensive; SAM bottles

and packages all of its products, and sells its beer to 350 wholesalers in the United States and

also to a network of importers and other agencies. The wholesalers then sell the product to

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retailers (pubs, restaurants, grocery stores, convenience stores, etc.) where it is made available to

consumers. A full range of the Companys core products (Samuel Adams line) are brewed at the

Pennsylvania Brewery and the Cincinnati Brewery; the Boston Brewery serves as an innovator

for developing new types of beers and packaging certain keg beers for the local market (2013

Annual Report, page 4).

Due to the heavy reliance on the quality of the product, the manufacturing process has a

lower-level error tolerance. Quality control is important to make sure the manufacturing process

continues smoothly, without errors that would compromise the product, or cause raw materials to

be wasted. Both the Boston Beer Company and Craft Brew Alliance exemplify this point;

monitoring production and quality control at all of their breweries. All of Craft Brew Alliances

breweries have an on-site laboratory where microbiologists and lab technicians supervise on-site

yeast propagation, monitor product quality, test products, measure color and bitterness, and test

for oxidation and unwanted bacteria. In addition, every batch of beer that BREW produces goes

through an internal taste panel to ensure that it meets the Companys taste and profile standards.

So, it can be concluded the manufacturing of beer is not a simple process.

Economic Attributes: Marketing The Boston Beer Company is committed to the marketing and product education process

of all of its brands, with a sales force of 380 employees, which is considered to be one of the

largest teams in the industry. Members of the sales force have a great deal of product knowledge

and are trained to educate distributors, wholesale, and retail buyers about the Companys

premium pricing and growth strategy, and also about the brewing and selling processes. This

helps to build stronger relationships among distributors and buyers. The Company also manages

media campaigns in the form of television, radio, billboard, and print ads in order to promote

events, local beer festivals, and new products (2013 Annual Report, page 3). The Company

hosts brewery tours and tastings at each of its four locations (the Boston Brewery, the Cincinnati

Brewery, the Pennsylvania Brewery, and the Angel City Brewery), which are important for

brand recognition and loyalty, since loyal consumers and drinkers of the product are interested in

learning about the Companys manufacturing and brewing processes.

Under Craft Brew Alliances Distributor Agreement with A-B, the company has entered

a network alliance in which instead of having to market and sell to various distributors, it has

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agreed to only pursue A-B or any of the distributors aligned with A-B. Nevertheless, BREW is

still responsible for its own marketing of products to A-B wholesalers, as well as retailors and

consumers.

The Craft Brew Alliance promotes its products through a national sales and marketing

network that includes but is not limited to: creating and executing a range of advertising

programs; training and educating wholesalers and retailers about products; and promoting

company name, product offerings and brands, and experimental beers at local festivals, venues

and pubs. It advertises and promotes products through an assortment of media, including

television, radio, billboard, print and social media, including Facebook and Twitter, which is all

very similar to SAMs marketing techniques.

Craft Brew Alliances breweries play a significant role in increasing consumer awareness

of products and enhancing image as a craft brewer. Thousands of visitors per year take tours at

the companys breweries, all of which have a retail restaurant or pub where products are served.

In addition, several of the breweries have meeting rooms that the public can rent for business

meetings, parties and holiday events, and that can be used to entertain and educate wholesalers,

retailers and the media about the companys products.

Economic Attributes: Investing & Financing The assets belonging to a company in the brewing industry are mostly long-term, and

primarily consist of property, plants, and equipment. The level of technology change is low;

small technological improvements have been made to make the brewing process more precise,

allowing brewers to control variables like temperature and ingredient proportions.

In 2013, approximately 60% of the Boston Beer Companys assets were composed of

PP&E. In terms of financing, the firm dictates low debt and high shareholders equity financing,

even though there is relatively little risk in the firms assets from technological obsolescence.

Craft Brew Alliances capital expenditures for 2013 were approximately $9.9 million, reflecting

continued investments in capacity, its pubs, efficiency and quality initiatives.

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Company Strategies The Boston Beer Companys mission is to create and offer a world-class variety of

traditional and innovative beers and ciders with a focus on promoting the Samuel Adams product

line. The Company has done exactly that by releasing several different flavored beers under its

Samuel Adams brand, including the Samuel Adams Boston Lager, Rebel IPA, Samuel Adams

Seasonals, BrewMasters Collection, and Sam Adams Light. The Company releases a plethora of

seasonal variety packs throughout the year under its Samuel Adams brand, and has also released

complementary products that have become increasingly successful, but do not distract from the

Companys main focus (Samuel Adams). The Angry Orchard hard cider brand exceeded the

Companys expectations in 2013, becoming the largest selling hard cider in the United States

(2013 Annual Report, page 2). This fact correlates with the Companys strategy, because the

Angry Orchard brand is growing, and so is the demand for hard cider, but it is not a distraction

from the Companys main product line. The Twisted Tea brand also demonstrates the Boston

Beer Companys innovative capabilities by branching out into the malt beverages sector.

Creating new flavors within each brand and expansion into different sectors of the industry

reflects the Companys nature of its products, which is a product differentiation strategy. SAM

has achieved high profit margins by creating unique products among each of its core brands for

particular market niches (Overview of Financial Reporting, Financial Statement Analysis, and

Valuation, pg. 15). As far as the Companys integration in the value chain goes, it creates and

manufactures its own products, which enhances product quality and brand loyalty. Conversely,

the Company outsources its distribution function to a network of distributors, as discussed

earlier. These distributors in turn sell the product to restaurants, beer/liquor stores, grocery

stores, pubs, etc. Geographically speaking, the SAM derives most of its revenue from the United

States, but as previously discussed, the Company has markets in other countries that provide a

significant advantage compared to other craft brewing competitors. SAMs strategy framework

has played a major role in the Companys success, and the results can be seen in the qualitative

factors discussed in previous paragraphs, as well as the financial statements which will be

discussed later in this analysis.

Craft Brew Alliance provides several factors contributing to its business strategy,

including an innovative complementary portfolio of beers and cidersdistinct, authentic craft

beer brandsa national brewing footprintand a diverse leadership team (2013 Annual

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Report, page 3). Craft Brew Alliance, like the Boston Beer Company, also maintains a product

differentiation strategy by producing of variety of specialty craft beers using high quality

ingredients under each of its five brand families: the Kona Brewing Company, Widmer Brothers

Brewing, Redhook Brewery, Omission Beer, and Square Mile Cider Company. BREWs

integration in the value chain is comparable to that of the Boston Beer Company, and as

previously discussed it manufactures and brews its own products. However, in terms of

geographical diversification, Craft Brew Alliance states that only one of its brands, Omission

Beer, continues to expand into international markets. The Company does not disclose which

country it markets in, except for the United States.

Restatement of the Financial Statement Bias is one of the largest elements located on a financial statement, which derives from

managements judgment when evaluating certain tangible and intangible assets. Such bias can be

misleading to a financial statement reader when deciding on which company to invest in because

they find themselves comparing apples to bananas. An analysis should only evaluate a company

after it has made the proper adjustments to the targets, and benchmarks, financial statements.

Hence, restating a companys financial statements allows for a fair comparison and evaluation

between companies.

In restating the Boston Beer Company (SAM) and Craft Brew Alliance (BREW)

financial statement we have taken a look at any discrepancies that derived from different

accounting treatments that the companies used for the same financial item or event. The three

main categories that require restatement are inventory, depreciation, and leases.

Inventory Restatement Inventory is only restated when the two companies have different methods for accounting

for inventory where one company uses last-in-first-out (LIFO) and the other uses first-in-

first-out (FIFO). The general rule when restating inventory is to examine the method

commonly used in the industry and then to restate both companies using the same method. The

inventory for SAM and BREW were not restated because both of the companies use the same

method when accounting for inventory FIFO or Lower Cost or Market (LCM). In addition,

the brewery industry favors the FIFO method because their earliest product has to be sold first to

avoid materials from expiring and going bad.

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Depreciation Restatement The discrepancy in depreciation, or amortization, between both companies derive from

multiple factors, one being the useful life of the capital assets, the residual value of the assets,

and the depreciation method used. Some companies use a more accelerated method of

depreciation, which allows for depreciation expense to be recognized in the earlier years of the

assets life compared to the straight-line method, which allocates the expense evenly over a set

period of time. In SAMs and BREWs case, both companies use the straight-line method when

depreciating their capital assets, and have similar useful life for the same assets. A restatement

for the small discrepancy in useful life is not material enough to affect the financial statements of

both companies, which is why depreciation and capital assets were not restated to another

amount.

Leases Restatement A majority of the time, the one item that is included on a companys financial statement

are leases operating leases, to be more specific. Leases are can be divided into two categories,

operating leases and capital leases. The advantage of have an operating lease is that the asset that

is being leased is not capitalized rather expensed through rent expense causing the asset to

never be reported on the balance sheet. Operating leases are examples of line items that are

restated, not because the method of accounting for leases differs between companies, but because

operating leases do not illustrate the financial impact of capitalizing a lease.

When restating SAMs and BREWs operating leases to capital leases, the companys

operating lease future commitment payments had to be established before discount the payments

to a present value amount, using the companys cost of borrowing. The cost of borrowing for

BREW is the weighted average of their current interest, calculated by dividing the current years

interest expense by the average short-term and long-term debt balances. Hence, the borrowing

rate used in discounting BREWs future commitment payments was 3.576%.

However, the same cost of borrowing computation was not used in SAMs operating

lease restatement because the company did not report any interest expense on their 2013, and

2012, year-end report instead they reported a net interest income. Their alternative prime rate

of 3.25%, found in note H of the annual report, was used in computing the present value of their

future commitments. That rate is their fixed borrowing rate on the line of credit they have from

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Bank of America, N.A. The sum of all the present value of the future commitments was used to

adjust both companies balance sheets. Though the balance sheet was restated, the income

statement was not since there is no materiality when reallocating rent expense into depreciation

expense and interest expense net income would have stayed the same. However, the affect on

depreciation expense and interest expense was used when computing both companys

profitability and risk ratios.

Following the restatement, BREWs and SAMs assets and liability increased by $12.7

and $8.6 million, respectively, for the end of 2013. The restatement for both companies had a

material effect on their financial statements, where SAMs and BREWs assets experienced an

increase of 1.93% and 7.46%, respectively. In addition, their 2012 balance sheet was also

restated to reflect the operating leases as capital. The restatement of the 2012 financials allows

for a better time series analysis of the companys profitability and risks. In 2012, BREWs and

SAMs assets and liability were adjusted to reflect an increase of $12.5 and $$8.4 million.

Located below is the present value commitment computation for both companies:

BREW

Years

Operating Lease

Commitments

(in thousands)

PV Factor PV of

Commitments

Sum of ALL

Commitments

2014 1,263 0.96548 1,219

2015 1,232 0.93215 1,148

2016 1,114 0.89997 1,003

2017 1,004 0.86890 872

2018 761 0.83891 638 4,881

Thereafter 12,416 - - 7,829

17,790

$12,710

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SAM

Years

Operating Lease

Commitments

(in thousands)

PV Factor PV of

Commitments

Sum of ALL

Commitments

2014 2,726 0.96852 2,640

2015 2,042 0.93804 1,915

2016 1,935 0.90851 1,758

2017 975 0.87991 858

2018 567 0.85222 483 7,655

Thereafter 1,154 - - 936

9,399

$8,591

Profitability Analysis Analyzing a companys profitability is crucial when evaluating them because it helps

identify a companys strategies, managements objectives, and managements efficiency at

executing their strategies. When analyzing the companys profitability, a hybrid approach much

be used in conjunction with common sizing the financial statements which allows for a better

comparison of apples to apples by eliminating the size factor. There are two main analysis that

are performed, a time series and cross sectional analysis. Each approach provides a separate

value, but when combined they provide a greater value because trends can be identified and then

compared to the appropriate benchmark. Before any profitability or risk analysis are done, both

financial statements should be restated accordingly and then common sized as a percentage of

total sales, or assets.

In SAMs and BREWs case, the most important trend that can be identified is a

companys life cycle stage. The life cycle stage permits for a better study of the profitability

measurements because a growth stage can be very beneficial for an investor that is looking for a

great upside. Nonetheless, an investor that is looking for a steady return would favor a mature

company that has proven themselves in the industry. An industrys life cycle is usually a great

starting point because it provides a blueprint of where your company is at and what to expect at

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that point of their stage. The time series analysis of the cash flow statement illustrated that both

companies are in a mid-growth stage, but BREW investing cash flow has fluctuated frequently.

The fluctuation is greatly due to the sale of their interest in Fulton Street Brewery LLC in 2011.

Located below is the cash flow trend of SAM and BREW, from 2009 to 2013:

-150,000 -100,000 -50,000

0 50,000

100,000 150,000

2009 2010 2011 2012 2013

(in th

ousa

nds)

Cash Flow Trend - SAM CF - Operating Activities CF - Investing Activities CF - Financing Activities.

-20,000

-10,000

0

10,000

20,000

2009 2010 2011 2012 2013

(in th

ousa

nds)

Cash Flow Trend - BREW CF - Operating Activities CF - Investing Activities CF - Financing Activities.

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Profitability Ratios Ratios help analyze a companys profitability because it allows for an examination of the

correlation between the income statement and balance sheet. The main measurements for

profitability is the return on assets (ROA), return on common equity (ROCE), cost of good

sold (COGS) as a percentage of sales, and selling, general & administrative (SG&A)

expense as a percentage of sales. Each ratio is interpreted differently but usually the

interpretation of one ratio can support another ratio turnover factors are a great example that

will be discussed later.

The ROA ratio measures the return on every dollar of assets that the company has

invested in. A high ROA illustrates that the company is using their assets every efficiently when

generating income for the company, adding value to the company. In this case, SAM has a

favorable ROA of 8.25%, when compared to BREWs ROA of 0.62%. However, SAMs ROA

its previous year was 9.28%, which is more efficient then the current years ROA. The 7.6%

decrease it suffered this year is because of a lack of asset efficiency, which derives from poor

management of their capital assets. In addition, BREWs ROA dipped from 0.86%, which is a

28%decrease from its 2012 yearend.

SAMs decreasing ROA is not as impactful to their company, as is BREWs decreasing

ROA because SAMs cost of borrowing, 3.25%, is much lower than their 8.25% ROA. An ROA

that is greater than the cost of borrowing is important due to the fact that assets are usually

financed, hence, a company should generate large enough outputs from the asset to cover the

financing cost of the asset and generate a profit.

On the other hand, ROCE focuses more on the common shareholders return after

factoring in the borrowing rate, and the value added to the common shareholders. Shareholders

usually require a high rate of return, and ROCE allows for the shareholder to measure their

required return to the actual return. In this case, SAM has a substantially greater ROCE, of

42.6%, than BREW, and SAMs ROCE has also increased by 6% when compared to the ROCE

provided in 2012. BREW has shown a decline in their ROCE of 26.7%, to 1.09% in 2012.

An analysis of the COGS and SG&A expense will demonstrate the factors that are

driving ROA and ROCE. Both ratios measure the factors that drive a companys net income and

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in this case the two driving factors of expense is COGS/SG&A as a percentage of sales. COGS

as a percent of sales measures a companys product cost structure. In this case BREWs cost

structure is not very well managed because their gross profit margin is only 28%, meaning that

the cost of the goods they sell are high. When comparing BREWs gross profit margin to SAMs,

one sees that SAM has managed to maintain a low cost of goods because their gross profit

margin is 52%. In addition, SAM also has managed their SG&A expenses exceptionally well,

and have even decreased it by 2.5% from the 2012 yearend.

Overall, SAM has proven that they know how to generate profits, by managing their main

expenses and still maintaining a high quality product, and brand. Located below is a detailed

look at the profitability ratios for both companies and the change from 2012 to 2013:

SAM

Ratios FY 2013 FY 2012 Change

Profitability Ratios

Return on Assets (ROA) 8.58% 9.28% -7.6%

Profit Margin for ROA 9.52% 10.25% -7.1%

Return on Common Equity (ROCE) 42.59% 40.19% 6.0%

Profit Margin for ROCE 9.52% 10.25% -7.1%

Capital Structure Leverage 4.9643 4.3285 14.7%

COGS to Sales % 47.92% 45.67% 4.9%

SG&A to Sales % 8.43% 8.65% -2.5%

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BREW


Profitability Ratios

Return on Assets (ROA) 0.62% 0.86% -28.0%

Profit Margin for ROA 1.25% 1.71% -27.1%

Return on Common Equity (ROCE) 1.43% 1.86% -23.0%

Profit Margin for ROCE 1.09% 1.49% -26.7%

Capital Structure Leverage 2.6437 2.4845 6.4%

COGS to Sales % 71.95% 70.45% 2.1%

SG&A to Sales % 25.93% 26.52% -2.2%

Turnover Ratios/Factors Turnover factors are large component of the profitability and risk analysis it measures

the rate, or speed, at which something is being converted into something else. They are also

considered drivers, or multiples, of other ratios, like ROA and ROCE. The main turnover ratios

are asset turnover, accounts receivable turnover, and inventory turnover. These factors help

identify how efficient management is at managing their short-term obligations.

The asset turnover ratio is a component of ROA and ROCE, because it measures the

amount of sales, or revenues, generated by every dollar of asset on the balance sheet. The more

money that one dollar of asset generates, the higher the multiple, then it generates a higher ROA,

or ROCE. In this case, SAM had a more favorable ROA and ROCE indicating that their asset

turnover should also be more favorable this statement holds true because SAM has an asset

turnover ratio of 0.901. The ratio illustrates that every dollar of asset is generating approximately

$0.90 of revenue. Where BREW only generates approximately $0.50 of revenue for every dollar

of assets. In conclusion, management is not using their assets very efficiently, or maybe they

have older assets that are not as efficient. Management at BREW should look to trade in some

older equipment for newer more efficient equipment.

The accounts receivable turnover ratio for this evaluation is not very reliable because the

companies did not disclose their credit sales figures, which is the amount that is needed when

calculating accounts receivable turnover. Hence, the total sales amount was used in computing

20

the accounts receivable turnover ratio, which measures how effective a companys receivables

collection process is. When a company takes a long time to collect their receivables they are

technically extending an interest free credit line to the customer, in return the company cannot

reinvest in products for the business.

Based on the information provided in the companys 2013, and 2012, annual report SAM

happens to have a more efficient collection processes of their outstanding receivables. Their

turnover rate for 2013 was 20.12, a 5.2% decrease from their previous year. On the other hand,

BREW had a lower turnover rate for their receivables, at 16.38, but has improved from the

previous year increasing by 15.3%. It proves that management is aware of the issue and has

established a more effective collection process. In brief, both companies have a very efficient

method of collecting receivables, but this turnover factor will later be applied to a short-term risk

factor that measures the amount of days it takes the company to collect their receivables.

An affective inventory system is detrimental to the success of any manufacturing

company especially ones that sell goods that can expire. That is why the inventory turnover

ratio is a good measurement of the amount of times inventory is turned over to generate sales. A

low turnover implies poor sales and inefficient buying, therefore, excess inventory. A high ratio

implies either strong sales, or effective buying. In this case, BREW shows that they manage their

inventory very well and have a good inventory system in place. When their 9.08 inventory

turnover ratio is analyze in conjunction with their COGS as a percentage of sales ratio, one can

concur that the company has a very ineffective buying system in place. They are turning over

their inventory very fast, but of the inventory is continues to be expensive management has a lot

of pressure to sell larger volume of units. However, SAM has a 7.03 inventory turnover ratio but

high gross profit margins meaning that if the volume of sales decreases they have a large

enough margin to withstand such a decline. Located bellow is a detailed look at the turnover

ratio table for both companies and the change from 2012 to 2013:

21

SAM


Turnover Ratios

Total Asset Turnover 0.901 0.906 -0.6%

Accounts Receivable Turnover 20.12 21.21 -5.2%

Inventory Turnover 7.03 6.76 4.0%

Fixed Asset Turnover 3.12 3.39 -8.0%

BREW


Turnover Ratios

Total Asset Turnover 0.496 0.502 -1.2%

Accounts Receivable Turnover 16.38 14.20 15.3%

Inventory Turnover 9.08 11.25 -19.3%

Fixed Asset Turnover 1.54 1.57 -1.5%

Risk Analysis Some level of risk governs every decision that is ever made, and being able to evaluate

the level of risk associated with an investment decision helps justify an investors expected return.

The general rule is that a higher risk constitutes a higher return, or larger losses depending how

the investment turns out. There are three main factors that must be taken into account when

analyzing a companys risk liquidity risk, solvency risk and the activity ratios. All the factors

will be discussed along with the key measurements associated with the analysis.

Liquidity (Short-term) Risk Being a liquid able company can be a positive factor, but can also have a negative affect

on the company. Many companies have to find the right balance between being to liquid and not

being as liquid able to meet current obligations. In analyzing the Boston Beer Company

(SAM) and Craft Brew Alliance (BREW), the current ratio was favored over the quick ratio

because the inventories of both companies have a high turnover rate meaning that it can rely on

22

their inventory to sell quickly. In addition, the operating cash flow to current liabilities ratio is

another indicator of how liquid a company is.

The current ratio measures if there is enough current asset to meet their current

obligations current liabilities. SAMs current ratio for their 2013 yearend is 1.54, which

means that for every dollar of current obligation on hand SAM has $1.54 of assets to cover the

current obligation. If the companys current ratio is 1 then that means that the company is

liquefiable enough to meet their current obligation, but if the ratio is greater than 2 then that

illustrates that the company is not investing their current assets efficiently. This is a scenario that

could lead to a company take over where the takeover firm retains all their current assets and

sells off the remaining assets. BREW has a current ratio of 1.15, which is dangerous because its

very close to a ratio of 1.

The operating cash flow to current liability ratio is favored by a lot of analyst because it

converts accrual amounts to cash amounts. The ratio measures how much cash flow from

operation is needed to cover the companys current liability. Both SAM and BREW have shown

a significant decline, of 16.3% and 42%, respectively, since there 2012 yearend. While

analyzing the operating cash flow trend, dating back to 2009, it was noticed that BREW's cash

flow from operation fluctuates from year to year - instead of having a steady growth like SAM.

This raises some concern because if there isnt enough cash inflow from BREWs main business

then in the future, more debt might have to be acquired to pay off current obligation which in

return increase interest expense, and reduce net income, ROA, and ROCE. Located bellow is a

detailed look at the short-term liquidity ratio table for both companies and the change from 2012

to 2013:

SAM


Risk Ratios -

(Short Term Liquidity Risk)

Current Ratio 1.5351 1.7897 -14.2%

Quick Ratio 0.8552 1.1679 -26.8%

Operating CF to CL Ratio 0.5057 0.6043 -16.3%

23

BREW


Risk Ratios -

(Short Term Liquidity Risk)

Current Ratio 1.1476 1.1397 0.7%

Quick Ratio 0.4559 0.5472 -16.7%

Operating CF to CL Ratio 0.2853 0.4916 -42.0%

Solvency (Long-term) Risk Having a good balance of long-term liabilities as it relates to short-term liability and

equity is considered as a good capital structure. Long-term risk should be assessed before

making any investments because leverage is a factor that does a lot of good for a company, but

also can destroy a company. The concept behind leveraging is to amplify your return on an

investment, if you have more money to invest then you can make more money on that

investment. However, if leverage is not carefully managed then a small loss could turn into a

large lost.

In analyzing leverage, one must look at the relationship between liabilities, assets, and

equity. This report focuses mainly on three key ratios liabilities to asset, long-term debt to

long-term capital and interest coverage ratio.

The liabilities to asset ratio provide a snap shot on how the companys assets are being

financed asset can be financed through the issuance of debt or equity. In SAMs case there

leverage ratio is .3327, meaning that 33.3% of SAMs assets are financed by debt, but for BREW

a larger portion of their assets are financed by debt 39.2%. When discussing leverage, a snap

shot of a point in time is not good enough for analyzing. In brief, both companies manage their

debt very well, and BREWs high leverage could be justified by the low ROCE that is provided

to the common shareholders so to increase their return they must leverage the company.

However, they should look to increase their sales before decreasing their leverage so they could

then have stronger sales to rely on.

24

Long-term debt to long-term capital helps identify the balance of debt as it related to the

long-term capital in the company. Long-term capital is defined as all the long-term debt and the

total shareholders equity because that is the capital that will be supporting the company in the

long haul. A larger amount is not favored because that means the company has to rely on long-

term debt, and incur interest expense on the debt. In SAMs case they have a better structure

when it comes down to long-term debt as it relates to long-term capital, with a ratio of 0.126

compared to BREWs ratio of 0.269. A low ratio offers SAM the flexibility to obtain more debt

for expansion at a lower rate if it had to.

Considered one of the most important measurements of leverage, is the interest coverage

ratio because it measures the number of times a firms income, or cash flows, could cover

interest charges. In this case SAM is considered very favorable because their ratio is 454.4,

which means they generate enough income, or cash flow, to cover their interest expense.

However, this ratio means very little to SAM since they generate enough interest income to

cover their interest expense. It also illustrates that management knows how to invest their assets

appropriately by generating enough income to pay off their debt. Such efficiency is considered

an extension of the ROA, where their cost of borrowing is so low and their ROA margin is so

high that they make money on their debt obligations. Located bellow is a detailed look at the

long-term solvency ratio table for both companies and the change from 2012 to 2013:

SAM


Risk Ratios -

(Long Term Solvency Risk)

Liabilities to Asset Ratio 0.333 0.334 -0.35%

Liabilities to Shareholder's Equity Ratio 0.498 0.501 -0.52%

LT Debt to LT Capital Ratio 0.126 0.116 8.83%

LT Debt to Shareholder's Equity Ratio 0.144 0.131 10.10%

Interest Coverage Ratio 454.426 394.722 15.13%

Operating CF to Total Liability Ratio 0.731 0.906 -19.23%

25

BREW


Risk Ratios -

(Long Term Solvency Risk)

Liabilities to Asset Ratio 0.3922 0.3926 -0.1%

Liabilities to Shareholder's Equity Ratio 0.6452 0.6463 -0.2%

LT Debt to LT Capital Ratio 0.2686 0.2775 -3.2%

LT Debt to Shareholder's Equity Ratio 0.3672 0.3841 -4.4%

Interest Coverage Ratio 4.5527 4.5659 -0.3%

Operating CF to Total Liability Ratio 0.1194 0.2108 -43.4%

Activity Ratios The purpose of calculating a companys activity ratios is to assess managements

efficiency and identify the companys weakness. Turnover factors play a key role in calculating

the activity ratios since they drive the companys activity. These ratios look at the companys

inventory efficiency, collections efficiency and revenue efficiency. Three key ratios that will be

discussed in more detail are days receivables outstanding, days inventory held, and days account

payable outstanding.

The days receivables outstanding measures the days it takes the company to collect their

accounts receivable. Both companies collect receivables fairly quick, but SAM collects their

receivables quicker. This is important when analyzing how long a company extends credit to

their customers for free - the rule of thumb is 30 days. Now days accounts payable outstanding is

a related ratio because it measures the amount of days it takes the company to payoff their

accounts payable. A larger number is favorable because then the company has interest free cash

flow they could invest in something else it's considered as borrowing cash interest free for a

number of days. Its the other side of the account receivables ratio. However, BREW has a

favorable accounts payable ratio, which is driven by their favorable accounts payable turnover.

The days inventory held measures the amount of days it takes the company to turnover

inventory to sales. In this case, BREW turns their inventory over quicker leading to higher

26

purchases, and generally higher volumes of sales. However, BREW's days in inventory has been

increasing while SAM has managed to decrease their inventory held days. This refers back to

BREWs business plan of having to sell a high volume of goods to maintain the gross profit

margin. Located bellow is a detailed look at the activity ratio table for both companies and the

change from 2012 to 2013.

SAM


Activity Ratios

Days Receivable Outstanding 18.1 17.2 5.4%

Days Inventory Held 51.9 54.0 -3.9%

Accounts Payable Turnover 10.9074 10.8142 0.9%

Days AP Outstanding 33.5 33.8 -0.9%

Revenues to Cash Ratio 11.9215 9.3650 27.3%

Days Revenues in Cash 30.6 39.0 -21.4%

BREW


Activity Ratios

Days Receivable Outstanding 22.3 25.7 -13.3%

Days Inventory Held 40.2 32.4 23.9%

Accounts Payable Turnover 9.1884 10.0613 -8.7%

Days AP Outstanding 39.7 36.3 9.5%

Revenues to Cash Ratio 46.3057 58.2944 -20.6%

Days Revenues in Cash 7.9 6.3 25.9%

27

Financial Statement Performance Analysis In conclusion, the Boston Beer Company (SAM) has out performed Craft Brew

Alliance (BREW) from a financial statement perspective. This was assumed because of the

life-cycle stage SAM is in, when compared to BREW. Being a more mature company leads to

risk being low, and in combination with efficient profitability a steady return for an investor is

expected. In the other hand, BREW is considered a more, risky investment when looking at the

financial statements. However, BREW could be a more favorable investment choice for certain

types of investors because high risks usually generate higher returns. The final conclusion will be

discussed in depth at a later time.

Financial Statement Projections As part of this analysis, we have performed an exhaustive projection of the income

statements and balance sheets because investors, while concerned with the current state of a

company, are most concerned with how the company will perform in the future. This is

additionally important in the craft brewery industry since the companies within the segment are

moving through their growth stages and are developing strategies for their maturity phase. The

complete, projected financial statements can be found in the appendix of this analysis.

Income Statement Boston Beer Company During the last few years Boston Beer has experienced rapid, double digit sales growth

reaching 26% from 2012 to 2013 and is poised to continue its growth trajectory. However, its

growth is limited if it desires to remain in the craft brewery industry. According to IBIS industry

analysis, to be considered a craft brewery a company must sell no more than 6 million barrels of

beer a year. When compared to the large breweries, this sales ceiling is extremely low and

presents some difficulties for Boston Beer in terms of its growth potential. To begin the

projections, at sales revenue, we had to first know our ceiling in terms of how much revenue

Boston Beer could theoretically earn while still being considered a craft brewery. To do this a

few assumptions had to be made. First, it is assumed that the 6 million barrel limit will not

change. Second, it is assumed that Boston Beer will continue to operate within the craft brewery

industry. Third, it is assumed that beer prices will increase by approximately 2% year over year,

a figure that was derived from both Boston Beers and Craft Brew Alliances financial reports.

After feeling confident in these assumptions, the price per barrel of beer was calculated by

28

dividing 2012 revenues ($628,580,000) by number of barrels sold (2,727,000). This price was

then projected out based on the 6 million barrel limit and a 2% growth rate in beer prices as seen

in the table below:

2012 Projected Max Revenue 2013

Projected Max Revenue 2014


Revenue $628,580,000 $1,410,674,352 $1,438,887,839 $1,467,665,596 Barrels 2,727,000 5,999,999 5,999,999 5,999,999 Revenue/ Barrel $230.50 $235.11 $239.81 $244.61

Projected Revenue $628,580 $793,705,000 $988,300,000 $1,116,779,000






$1,497,018,908 $1,526,959,286 $1,557,498,472 $1,588,648,441 $1,620,421,410 5,999,999 5,999,999 5,999,999 5,999,999 5,999,999 $249.50 $254.49 $259.58 $264.77 $270.07

$1,194,954,000 $1,266,651,000 $1,329,983,000 $1,383,183,000 $1,424,678,000






$1,652,829,838 $1,685,886,435 $1,719,604,164 $1,753,996,247 $1,789,076,172 5,999,999 5,999,999 5,999,999 5,999,999 5,999,999 $275.47 $280.98 $286.60 $292.33 $298.18

$1,467,418,000 $1,511,440,540 $1,556,783,756 $1,603,487,269 $1,651,591,887






$1,824,857,696 $1,861,354,850 $1,898,581,947 $1,936,553,585 $1,975,284,657 5,999,999 5,999,999 5,999,999 5,999,999 5,999,999 $304.14 $310.23 $316.43 $322.76 $329.21

$1,701,139,644 $1,752,173,833 $1,804,739,048 $1,858,881,219 $1,914,647,656




$2,014,790,350 $2,055,086,157 $2,096,187,880 5,999,999 5,999,999 5,999,999 $335.80 $342.51 $349.36

$1,972,087,086 $2,031,249,698 $2,092,187,189

29

Using Boston Beers quarterly filings, 2014 sales revenue was relatively easy to predict.

By analyzing the trend in sales year over year, we were able to determine what percentage of

total sales the sales from the first two quarters were historically and projected that forward using

the table below:

Revenue Projection 2011 2012 2013 2014

Projection Q1-2 257,423 282,620 341,351 444,735

% Year End 46% 45% 43% 45% Year End $558,282 $628,580 $793,705 $988,300

Projecting the excise tax was straightforward due to the fact that as a percentage of the

change in sales its growth was consistently near 4%. Thus this 4% was projected into the future

as a percentage of the change in sales bringing us to projected net revenue for 2014. In order to

project cost of goods sold for 2014, we used a backdoor approach relying on the companys net

depletion (or sales) growth expectations for year-end 2014 of 20%. After this process was

complete, we projected a gross profit of $462,760,000, representing a 20% growth in net sales.

Moving on to the expense section of the income statement, a percentage-of-sales-growth

analysis was performed on the advertising, promotional, and selling expense account as well as

the total operating expenses in aggregate. For the advertising expense account, it was determined

that it increased by approximately 25% of the growth in sales on average during the period of

2008-2013. When implemented, this percentage was also in-line with the companys

expectations of an increase in advertising expenses of approximately $50 million to $70 million

from 2013 to 2015. Boston Beer also had expectations that its total operating expenses would be

approximately 30%-35% of sales for the foreseeable future. Using this range we arrived at a total

operating expense of $333,379,000. Expected impairment losses of $1,800,000 were disclosed

as well causing the difference between the total operating expenses and the advertising expenses

and the impairment loss to become our projected general and administrative expense for the year

2014. After completing these calculations, the projected operating income for 2014 is

$81,491,000.

30

Other expenses and income were fairly easy to project, using the historical amount of

$31,000 for interest income and zeroing out the non-material other section. A 38% tax rate was

assumed based upon the companys prediction as well as the industry and a projected net income

of $81,491,000 was arrived at representing a 16% growth in income.

In general, this method was continued to project every years income statement except for

the following changes:

o IBIS expected sales growth rates for the industry were 13% for 2015, 7% for 2016, 6%

for 2017, 5% for 2018, 4% for 2019, and 3% for 2020. These sales growth rates were

assumed for our projections each year out to 2020.

o Boston Beer expected its 2015 depletions (sales) to grow by 10% to 15% from 2014 to

2015.

o Boston Beer expected its 2015 gross margin to be between 51% and 53%.

o Impairment losses were zeroed out after 2014.

As mentioned earlier, Boston Beer is faced with a sales growth ceiling. If the company wishes to

stay within the craft beer industry, which is claims that it does, it cannot exceed 6 million barrels

in sales each year. Assuming that this requirement does not change, Boston Beer will meet the

IBIS expected sales growth rate of 3% for 2020 and be able to continue at a rate of 3% until 2034

when its sales revenue would then exceed the ceiling calculated in the table below:




Revenue $2,055,086,157 $2,096,187,880 $2,138,111,638 Barrels 5,999,999 5,999,999 5,999,999 Revenue/ Barrel $342.51 $349.36 $356.35

Projected Revenue $2,031,249,698 $2,092,187,189 $2,154,952,805

Thus, after 2034 Boston Beer will only be able to grow its sales by the growth rate in the price of

beer (assumed in this projection as 2%). The complete projected income statement can be found

in the back of this analysis.

31

Income Statement Craft Brew Alliance Craft Brew Alliance, as compared to Boston Beer, is a younger company and is still early

in its growth stage. To begin the projection of their income statement, we wanted to maintain the

IBIS industry growth rate expectations as stated above but at the same time reflect a tighter

spread indicative of an early-stage company. Late in 2014, the company issued its own

projections for its 2014 year end metrics and stated that it expected sales to grow by 7% to 9%.

Attempting to be conservative in our estimates, we chose 7% and grew their projected 2014 sales

by that amount.

Similar to Boston Beer, projecting the excise taxes was simple as historical analyses

showed that on average they grew at a rate of 7% of the change in sales year over year. Also

similar to Boston Beer, Craft Brew Alliance issued an expected gross margin of between 28%

and 35% for 2014. Again, wanting to project in a conservative manner, we chose 29% and

arrived at a gross profit of $55,676,000 for 2014. Using this value we were able to back

ourselves into a projected cost of goods sold.

Craft Brew Alliance reported selling, general, and administrative as the only line item

under operating expenses. Additionally, the company stated that it expected these expenses to be

27% of sales each year for the foreseeable future. For 2014 these expenses were found to be

$55,594,000, causing our projected operating income to be $83,000. On average, the companys

interest expense declined by 1% to 2% of the change in sales and the companys other expense

category grew by 1% to 2% of the change in sales. As with Boston Beer, the company expects its

tax rate to be approximately 38% and we projected that percentage out into perpetuity. Taking

these calculations into consideration, Craft Brew Alliances projected net income for 2014 is -

$727,000.



o We deviated from the IBIS expected industry growth rate due to the fact that Craft Brew

Alliance is such a young company and will most likely experience higher-than-average

growth compared to other, more established craft brewers like Boston Beer. Instead of

32

gradually bring the growth rate down to 3%, we kept the companys growth rate higher

and brought the growth rate down to only 5% during the period of 2014 to 2021.

o The craft brew barrel limits are not as applicable to Craft Brew Alliance as they are with

Boston Beer.

Balance Sheet Boston Beer To begin the balance sheet projection for Boston Beer, we looked back to 2008 to

develop reliable estimates for inventory turnover, accounts receivable turnover, and accounts

payable turnover. This analysis allowed us to visualize trends in each ratio to determine what

direction the company was moving in terms of its inventory, receivables, and payables

management. We were also able to develop reliable 2014 turnover estimates for these three

metrics based on quarter three figures. These quarter three ratios were consistent with the trends

seen from 2008 to 2013 and were thus used for our 2014 projections of inventory based on

projected cost of goods sold, accounts receivable based on projected sales, and accounts payable

also based on projected cost of goods sold. As a contra-asset account, doubtful accounts was

projected based on its historical average of accounts receivable. Cash was also projected based

on the average of cash-on-hand from 2009-2013, $55,000,000, which stayed fairly stable most

likely representing a specific company strategy of how much cash they should hold. The deferred

tax asset, as seen in the table below, was able to be reasonably projected based on its historical

percentage of income from 2010-2013. After computing all of these variables, we determined

that the total current assets at the end of 2014 would be $607,842,000.

2008 2009 2010 2011 2012 2013 All. D/A 1.3925% 1.1022% 0.6009% 0.2833% 0.3955% 0.3795% AVG 0.6923%

Moving to fixed assets, property, plant, and equipment (net) was projected based on the

companys expectations of capital spending for 2014 and 2015. Additionally, goodwill was

projected as equal to its 2013 level based on the quarter three value for the account. Adding these

amounts to the current asset projections, we expect total assets for 2014 to be approximately

$607,842,000.

33

Continuing down the balance sheet to current liabilities, accounts payable was projected

based upon 2014s quarter three payable turnover ratio and applied to the expected total 2014

cost of goods sold. Current debt was estimated using the accounts trend from quarter one of 2014

to quarter three of 2014. Lastly, accrued expenses and other current liabilities was projected by

applying the year-over-year percentage of operating expenses. The average percentage over the

past six years was used against the projected operating expense from the income statement for

each year. This table is provided below.

2009 2010 2011 2012 2013 Ac/Exp 48,531 52,776 48,243 60,529 72,540 Tot.Exp

159,547 175,149 180,912 219,626 271,829

%

30% 30% 27% 28% 27% AVG % 28%

After computing the total current liabilities of $144,093,000 for 2014, we then estimated

deferred income tax liability using the historical percentage of net income illustrated below.

2009 2010 2011 2012 2013 D.T - L 13,439 17,087 17,349 20,463 32,394 Income

31,118 50,142 66,059 59,467 70,392

%

43% 34% 26% 34% 46% AVG % 37%

Rather than project the long term debt account, we wanted to instead project the equity

section and use the long term debt account as a plug number. Common stock historically stayed

stable at around 128,000 to 130,000 so we used 130,000 as our projected amount. Additional

paid-in capital was projected using inter-quarter trends, as was accumulated other comprehensive

loss. Finally, we calculated retained earnings as the previous years ending amount plus 2014s

net income, enabling us to arrive at the plug value of $3,180,000 in long term debt.



34

o Between 2014 and 2020, we continued to decline our inventory turnover and accounts

receivable turnover forecasts based on historical trends. We maintained a fairly stable

forecast for accounts payable turnover.

o We began to minimally increase cash on hand which we justified as being a result of a

maturing company.

o In 2015, we began projecting additional paid-in capital based on its average growth rate

of 13% from 2008 to 2014.

o Also beginning in 2015, we projected accumulated other comprehensive loss at its seven

year average of -$541,000

o To better project retained earnings after 2014, we began deducting the cost of stock

buybacks at a rate of $30,000,000 per year which is based on a historical average.

After the completion of Boston Beers balance sheet projection, we gained further

confidence based on how closely we tracked the historical trends in the debt to equity and debt to

asset ratios as seen in the table below:

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 D/E 57% 52% 56% 47% 47% 50% 43% 40% 35% 30% 27% 25% 23% D/A 36% 34% 36% 32% 32% 33% 30% 29% 26% 23% 21% 20% 19%

Balance Sheet Craft Brew Alliance To begin our projection of Craft Brew Alliance, we looked at the 2014 quarter three

values and began developing time series trends among these accounts. For example we began

bringing the cash balance down, which is in line with the companys growth strategy. We also

continued the increasing trend in the deferred tax asset account as well the deferred tax liability

account. Accrued expenses have, on average, grown by approximately $200,000 to $300,000

every year and we continued that trend into 2014 and beyond. Property, plant, and equipment

showed a shallow increasing trend and this trend was projected into 2014. Additionally, goodwill

remained steady at $12,917,000 for 2014 and every year thereafter.

Moving past our projections based upon historical trends, we were able to project

inventory, accounts receivable, and accounts payable based upon their turnover values as of

quarter three 2014. These turnover values were then applied against their respective projected

35

income statement account and relayed back to the balance sheet. Other large items such as

accrued salaries, wages, and payroll taxes as well as current debt were also able to be projected

based on historically percentages of operating expenses and long term debt respectively as seen

in the two tables below.

2008 2009 2010 2011 2012 2013 Accrued Salaries / Operating Expenses

17.63% 13.29% 11.38% 11.73% 9.94%

AVG 12.79%

2008 2009 2010 2011 2012 2013 2014 Current Debt Portion / LTD Portion

4.38% 6.00% 9.97% 4.52% 5.16% 6.43% 7.90%

AVG 6.34%

Shifting to the equity section, common stock was projected at 94,000 based on the fact

that it has not changed from 94,000 since 2010 and the quarter three 2014 report had a common

stock value of 94,000. Additional paid-in capital was projected based upon its historical trend of

minimal growth over that past six years and retained earnings was simply estimated by including

current year net income with last years ending retained earnings.

As with Boston Beer, we used the long term debt account as a plug to bring our financial

statement into balance. After projecting all of the necessary accounts, we projected $183,126,000

in total assets, $71,786,000 in total liabilities, and $111,340,000 in total equity.



o Our projections for intangible assets were based off of 2008-2014 averages.

o Our projections for accumulated other comprehensive loss were based off of 2008 2014

averages.

After the completion of Craft Brew Alliances balance sheet projection, we gained further

confidence based on how closely we tracked the historical trends in the debt to equity and debt to

asset ratios as seen in the table below.

36

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 D/E 86% 76% 68% 52% 53% 53% 64% 65% 64% 62% 65% 65% 64% D/A 46% 43% 40% 34% 35% 35% 39% 40% 39% 38% 39% 39% 39%

Valuation Analysis The next part of this analysis is to value both companies forever. There are two different

models that can be used to determine the value of a company. These two models are the

dividend model and the residual income model. Since neither SAM nor BREW pays dividends,

the residual income model was used to calculate an exact value on both companies.

Residual income is the excess of the book value of a firm multiplied by the cost of

capital. In simpler terms, the residual income is the difference between a companys expected

earnings and their actual earnings for a given year. The first step of the residual income model is

to determine the book value of the company at the beginning of each year. After that, one must

determine the required, or expected, earnings for that year. To compute the required earnings,

simply multiply the book value at the beginning of the year by the cost of capital. Then, take the

difference between the expected earnings and the projected earnings to find the residual income.

This process must be repeated for every year until the growth rate levels off. In order to

calculate the actual value of the company as of right now, one must find the present values of the

residual incomes for the finite period. Once the growth rate levels off, find the value of the

company for the infinite period. To compute this, calculate the present value of the residual

income perpetuity. After all of the present values have been calculated, then find the sum of

these values. Once the sum of the present values is found, add the beginning retained earnings of

the current year. When that total is computed, the half-year convention is applied. To apply the

half-year convention, multiply the total value by one, plus half of the cost of capital. Once this

step is complete, it produces the current value of the company using the residual income model.

To calculate the present value of SAM, the residual income model was used. Before

calculating the residual income, the cost of capital needed to be computed. We took the

difference between the return on the market of 0.115 and the risk free rate of 0.0182 and

multiplied the difference (market risk premium) by the beta of 0.16. We then added that number

to the risk free rate to give a cost of capital of 0.033688. Once we found the cost of capital, also

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known as the capital asset pricing model (CAPM), we were able to calculate the residual income.

Starting with 2014, we found the residual income for every year up until 2034, which is when we

anticipate the growth rate to level off. We used the year 2034 as the first year of the perpetuity.

We then found the present value of the residual income for the finite period, which was

$1,432,478.01. After that we calculated the present value of the residual income perpetuity

starting in 2034, which was $4,236,724.82. We then took these two numbers and added them to

the beginning book value of SAM of $302,085. After applying the half-year convention to this

total, we found the current value of SAM to be $6,071,868.

To find the present value of BREW, we followed the exact same process that we used to

calculate the value of SAM. First, we used the risk free rate of 0.0182, the return on the market

of 0.115, and the beta of 0.44 to calculate the CAPM, for which we got 0.060792. Then, we used

the CAPM rate to calculate the residual incomes from 2014 to 2021. We expect that the growth

rate will level off as of 2021. After calculating the residual incomes, we found the present value

of the finite period to be $26,739.86. Then, we calculated the present value of the residual

income perpetuity starting in 2021 to be $582,837.79. We then took these two numbers and

added them to the original book value of $111,232. After applying the half-year convention to

this total, we found the value of BREW to be $742,719.38.

In order to further analyze these companies, we can compare the value of the company to

its current stock price. By taking the total value of the company and dividing it by the number of

shares outstanding, we can determine if the current market price is undervalued or overvalued.

We determined the total value of SAM to be $6,071,868. As of Monday, November 17th, SAM

had 12,980 shares outstanding. By dividing the total value by the number of shares outstanding,

the implied price per share using the residual income model is $467.79. On November 17th,

SAM had a closing market price of $257.71. According to the residual income model, the

current market price of SAM is grossly underpriced. We determined the value of BREW to be

$742,719.38. As of Monday, November 17th, BREW had 19,070 shares outstanding. By

dividing the total value by the number of shares outstanding, the implied price per share is

$38.95. On Monday, BREW had a closing market price of $13.85, meaning that BREW is also

underpriced. When a company is underpriced, you can make the assumption that there is more

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room for them to grow. You want to buy stock when the price is undervalued and you want to

sell stock when the price is overvalued.

Conclusion After completing our analysis of SAM and BREW, we strongly believe that BREW is the

stronger company. Based on some of our key financial ratios, including profitability and risk,

SAM is performing at a more promising level. However, we believe that BREW is trending in

the right direction and that their stock price will continue to grow. SAM is already a well-

established company with a significant brand portfolio. Because SAM is such a large company,

their potential growth is limited. They are already producing at a level that is capped by the 6

million barrel limit. BREW, on the other hand, is only producing about 2 million barrels of beer

annually. The craft beer industry is rapidly increasing. SAM prides themselves on being a craft

brewer so they are unable to produce more than 6 million barrels. BREW will be able to take

advantage of the growing market and increase at a faster rate than SAM.

BREWs relationship with Anheuser-Busch has both positive and negative impacts.

Anhueser-Busch currently owns 32.3%, which, as mentioned previously, technically disqualifies

it from being called a craft brewery. More importantly to prospective investors, however, is that

fact that it appears that Anhueser-Busch is poised to take majority or full ownership of the

company. This should concern investors because it means that no matter the size of their

investment, they will always have a non-controlling interest in the firm, resulting in ownership of

value only, not the decision making processes which will prove critical in the coming years as

the craft beer industry faces new challenges in consumer taste and market trends. Additionally,

association with such a large mainstream company will certainly impact the firms image as a

craft brewery, especially among the firms primary market segment. SAM has developed,

through shrewd marketing and consistent management, a firm following in that segment and

among other more casual consumers. Despite the companys large size, they are dedicated to

their craft beer roots and attempt to portray an image of boutique quality and care in their

product successfully. While these are some reasons for concern, there are many reasons why

Anheuser-Busch can help BREW grow. Because BREW is a smaller company, they dont have

the proper resources for rapid growth. This is where Anheuser-Busch comes into play.

Anheuser-Busch has allowed BREW to distribute beer all over the country. BREWs association

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with Anheuser-Busch has made them a more popular brand. With their ability to grow and their

connections with AB, BREW has unlimited potential to grow. The choice in which company to

invest is tied to the amount of risk tolerance that investors have. If investors are looking for a

safe investment with limited returns, we would recommend investing in SAM. However, if

investors are willing to take a risk and are looking for unlimited returns, we would strongly

encourage investors to choose Craft Brew Alliance.

Our projections and valuation favor a return on BREW of 281% compared to SAMs

182%. As attested to by our key financial ratios, financial statement restatements and growth

models, SAM is the less risky of the two businesses. A .16 beta suggests a company that is very

loosely, positively correlated with the market. In other words, demand for SAMs goods is

relatively inelastic when compared to BREW and other beer companies (as well as most other

consumables). This means that in good markets or poor markets that the company will be

providing value to its shareholders and that an investor that buys SAM today is much more likely

to be unaffected by a slow market. While investing in BREW is a riskier decision, our belief is

that BREW will indeed grow and give investors the types of returns that one can only dream of.

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Bibliography Brewers Association. Education. November 2014 .

Craft Brew Alliance, Inc. 2013 Annual Report. 10-K. Portland, 2013.

. "BREW Investor Presentation." 2014.

. Investor Relation. November 2014 .

New York University. Annual Return on Stock, T.Bonds and T.Bills: 1928 - Curreny. November 2014 .

The Boston Beer Company, Inc. 2013 Annual Report. 10-K. Boston, 2013.

. Investor Relation. November 2014 .

U.S. Department of Treasury. Daily Treasury Yield Curve Rates. November 2014 .

Wahlen, James M., Stephen P. Baginsk and Mark T. Bradshaw. Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective. 7th. Mason: Cengage Learning Inc., 2008.

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Appendix A Restated Financial Statements Craft Brew Alliance [BREW]

CONSOLIDATED BALANCE SHEETS (USD $) FY 2013 (Restated)

FY 2012 (Restated) FY 2013 FY 2012 FY 2011 In Thousands, unless otherwise specified

Current assets:

Cash or Cash Equivalents 2,726 5,013 2,726 5,013 795 Accounts receivable, net 11,370 10,512 11,370 10,512 13,326 Inventories 16,639 11,749 16,639 11,749 9,446 Deferred income tax asset, net 1,345 1,250 1,345 1,250 894 Other current assets 3,403 3,809 3,403 3,809 2,816

Total current assets 35,483 32,333 35,483 32,333 27,277

Property, equipment and leasehold improvements, Net 116,903 115,307 104,193 102,852 100,725

Goodwill 12,917 12,917 12,917 12,917 12,917 Intangible and other assets, net 17,693 17,562 17,693 17,562 17,989

Total assets $182,996 $178,119 $170,286 $165,664 $158,908

Current liabilities:

Accounts payable 14,742 12,255 14,742 12,255 10,994 Accrued salaries, wages and payroll taxes 4,616 5,267 4,616 5,267 4,524 Refundable deposits 8,252 7,896 8,252 7,896 7,400 Other accrued expenses 1,381 1,066 1,381 1,066 1,436 Current portion of long-term debt and capital

lease obligations 710 642 710 642 596 Total current liabilities 30,920 28,370 29,701 27,126 24,950

Long-term debt and capital lease obligations, net of current portion 22,540 23,651 11,0

the brewing industry at a glance

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