Boston Beer Company

Group 4 Jose Aleman Andrew Fulham Scott Sorensen Stephanie Soybel Taylor Williams
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Recommendation

We value Boston Beer Company (NYSE: SAM) at $63.38 per share, and recommend that investors hold these securities.
Current Market Price of $65.21 Increased competition will hinder revenue growth and

company expansion Market Growth within Industry Stagnation

Agenda

Overview Financials Strategy Valuation

3

Boston Beer Company History

1984

Jim Koch founds Boston Beer IPO at $20 per share Twisted Tea launched

1995
2001 2002 2007 2008

Sam Adams Light launched

Purchase of PA brewery Product recall in April
Financials Strategy Valuation

Overview

Boston Beer Feels Competition from All Sides

. .

Imports

Wine & Spirits

Craft Beers

Industry Leaders

Overview

Financials

Strategy

Valuation

Consolidation of Domestic Beer Production

Domestic Beer Production
Other, 20% Boston Beer Company, 1%

MillerCoors 29%

AB InBev, 50%
Source: www.ibisworld.com

Overview

Financials

Strategy

Valuation

Domestic Beer Production is Decreasing

Total Domestic Beer Production

$200 2.00% 1.50% $198 1.00% $196 0.50% $194 0.00% -0.50% $192 -1.00% $190 -1.50% $188 2001 2002 2003 2004 2005 2006 2007 Source: www.ibisworld.com 2008 2009 -2.00% Produced % change

Overview

Financials

Strategy

Valuation

Boston Beer operates within the Better Beer category

Craft, Import, and Specialty Beer 20% of Domestic Beer Market

Category profitability realized by Major Brewers

Samuel Adams is the largest domestic brewer and 3rd largest Brewer in the Better Beer Category

Overview

Financials

Strategy

Valuation

Craft Beer: Growth within Stagnation

Craft Beer experienced 12% growth in 2009

6th Straight year this category has outperformed the Beer Industry
Craft Beer drinkers are loyal to the Craft Beer Industry
Strategy Valuation
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Major Craft Beers:

Sam Adams Sierra Nevada New Belgium
Overview Financials

Boston Beer sells 2 of the top 3 Craft Beers

Top Selling US Craft Beers in 2009
1) Sierra Nevada Pale Ale 2) Samuel Adams Boston Lager 3) Sam Adams Seasonal 4) New Belgium Fat Tire Amber Ale 5) Shiner Bock 6) Widmer Hefeweizen 7) Sam Adams Variety Pack 8) Sam Adams Lite
Source: Beverage Industry Magazine

Overview

Financials

Strategy

Valuation

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3 Tier Distribution System

Brewery

Wholesalers

Retailers

Overview

Financials

Strategy

Valuation

11

Diverse Product Portfolio

Boston Beer Co. (SAM)

8 Flavored Malt Beverages

(13%)
Overview

20 Unique Beers (87%)

Financials Strategy

1 Hard Cider (0.06%)

Valuation
12

Current Market Analysis

Current Consumer Base

Specific Market Segment Beer Lovers Quality over price

Strengths
Niche Market Highly Trained Sales force Brand Differentiation

Overview

Financials

Strategy

Valuation

13

Market Opportunities and Risk

Advertising Expenditures
$300 45%

40%
$250 35% $200 30% 25% $150 20% $100 15% 10% Advertising Expense As % of Revenue

$50
5% $0 0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Overview

Financials

Strategy

Valuation

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Overview Financials Strategy Valuation

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Historical Revenue Growth

Revenue
$500.00
$450.00 $400.00 $350.00 $300.00 $250.00 $200.00 $150.00 $100.00 $50.00 $0.00 2005 2006 2007 2008 2009 0.00% 5.00% 10.00% 15.00% Revenue Rev Growth 20.00%

25.00%

2005-2009 CAGR of 14.5% Growth rate slowed to almost zero in 2009 Overview Financials Strategy Valuation
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Projected Revenue
Projected Revenue
$1,000.00 $900.00 $800.00 $700.00 $600.00 12.50% $500.00 12.00% $400.00 $300.00 $200.00 $100.00 $0.00 2010 2011 2012 2013 2014 11.50% 11.00% 10.50% 10.00% Revenue Revenue Growth 14.50% 14.00% 13.50%

13.00%

Projected revenue growth at 14%

Overview Financials Strategy Valuation
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Cost of Goods Sold

Cost of Goods Sold

250.00 60.00% 50.00%

200.00

40.00%
150.00 COGS 30.00% 100.00 20.00% 50.00 10.00% 0.00% 2005 2006 2007 2008 2009 COGS as % of Revenue Industry Average

0.00

Establishment of a new brewery allowed Boston Beer to decrease its production costs slightly In the future, Boston Beer is not expected to further reduce costs by more than 2%

Overview

Financials

Strategy

Valuation

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Financial Analysis Financial Analysis

Boston Beer has no short or long term debt Can finance its own capital expenditures

Net profit margin of 7.5% in 2009 ABInbev:12.55% SABMiller:10.6%

Source: Global Business Browser

Overview

Financials

Strategy

Valuation

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Overview Financials Strategy Valuation

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Competitive Strengths

Leadership built on scale, quality and branding Consumer preferences are shifting towards premium beer Agreements with suppliers and distributors yield stability and predictability.

Overview

Financials

Strategy

Valuation

Threats

Increasingly competitive segment

Low switching costs among consumers
Intensified efforts from industry leaders to

penetrate the market Low barriers to entry at the microbrewer level

Need to increase differentiation from premium products in wine and spirits industry
Overview Financials Strategy Valuation

Opportunities

Geographic expansion
Domestic
International Emerging markets

Risks
Direct competition with regional brewers Competition with major industry leaders

Product diversification

Overview

Financials

Strategy

Valuation

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Overview Financials Strategy Valuation

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Discounted Cashflow Analysis

Base Case Total Revenue Cost of Revenue, Total Gross Profit Income After Tax Depreciation NWC Discounted Cashflow 2010 $480.69 217.09 263.61 45.04 10.19 7.27 $44.08 2011 $547.99 247.48 300.51 51.34 11.62 8.29 $46.19 2012 $624.71 282.13 342.58 58.53 13.25 9.45 $48.40 2013 $ 712.17 321.63 390.55 66.73 15.10 10.77 $50.71 2014 $811.87 366.65 445.22 76.07 17.21 12.28 $53.13

Perpetuity Growth Terminal Value Enterprise Value

3.5% $657.57 $900.07

Debt to Equity Ratio

Equity Value per Share $63.38 Current Market Value $65.21

Overview

Financials

Strategy

Valuation

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Best and Worst Cases

Base
Revenue Growth Rate COGS % of Revenue

Optimistic
16% 41% 4%

Pessimistic
12% 43% 3%

14% 42% 3.5%

Perpetuity Growth Rate

Equity Value per Share

Current Market Value

$63.38
$65.21

$77.07

$52.54

Overview

Financials

Strategy

Valuation

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Sensitivity Analysis
Sensitivity Analysis of Equity Value per Share
$80.00 $75.00 $70.00 $65.00 $60.00 $55.00 Equity Value per Share

$50.00
$45.00

Revenue Growth Rate

Advertising Expenses as % of Revenue

-10 Pct +10 Pct

COGS as % of Revenue

Overview

Financials

Strategy

Valuation

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Sensitivity Analysis
Discount Rate vs Equity Value per Share
$91.00 $86.00 $81.00 $76.00 $71.00 $66.00 $61.00 $56.00 $51.00 $46.00 $41.00 5.00% Equity Value per Share

7.00%

9.00% 11.00% Discount Rate

13.00%

15.00%

Overview

Financials

Strategy

Valuation

28

Recommendation

We value Boston Beer Company (NYSE: SAM) at $63.38 per share, and recommend that investors hold these securities.
Current Market Price of $65.21 Increased competition will hinder revenue growth and

company expansion Market Growth within Industry Stagnation

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Appendices

30

Five Forces Summary

Suppliers

Stable and predictable Pressure to differentiate

Customers
New entrants Substitutes Competition

High threat, moderate barriers

Craft beer is not wine Secure niche market
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Larger Competition

AB Inbev
Shock Top
Colorado Native Redhook

MillerCoors produces several craft beers

Blue Moon Henry Weinhard

Leinenkugel

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Assumptions

Revenue Growth Rate Recalls COGS % of Revenue

14% 0 42%

SG&A
Income Tax Excise Taxes Advertisement Expense Perpetuity Growth

8%
44% -7.0% 28% 3.5%

Risk Premium 30-Year Bond Rate Discount Rate

0.80
6% 4.00% 8.80%

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Income Statement 2005-2014

Source: Global Business Browser / Reuters
Year Ending (December)(in Millions) Gross Revenue Sales Returns and Allowances Excise Tax Receipts Revenue Total Revenue Cost of Revenue Cost of Revenue, Total Gross Profit Selling/General/Administrative Expense Advertising Expense Total Selling/General/Administrative Expenses Impairment-Assets Held for Use Unusual Expense (Income) Total Operating Expense +COGS Operating Income Interest Income - Non-Operating Interest/Investment Income - Non-Operating Interest Income (Expense) - Net Non-Operating Total Other Non-Operating Income (Expense) Other, Net Income Before Tax Total Income Tax Net Income 2005 263.3 0.0 -25.0 238.3 238.3 96.8 96.8 141.5 17.3 100.9 118.2 0.0 0.0 215.0 23.3 1.8 1.8 1.8 0.4 0.4 25.5 10.0 15.6 2006 315.3 0.0 -29.8 285.4 285.4 121.2 121.2 164.3 22.7 113.7 136.3 0.0 0.0 257.5 28.0 3.1 3.1 3.1 0.7 0.7 31.8 13.6 18.2 2007 380.6 0.0 -38.9 341.6 341.6 152.3 152.3 189.4 24.6 124.5 149.0 3.4 3.4 304.8 36.9 4.3 4.3 4.3 0.5 0.5 41.6 19.2 22.5 2008 449.6 -13.2 -37.9 398.4 398.4 214.5 214.5 183.9 35.0 132.9 167.9 1.9 1.9 384.3 14.1 1.6 1.6 1.6 0.2 0.2 15.8 7.8 8.1 2009 453.4 0.0 -38.4 415.1 415.1 201.2 201.2 213.8 36.9 121.6 158.5 1.0 1.0 360.8 54.3 0.1 0.1 0.1 0.0 0.0 54.4 23.2 31.1 2010 516.9 0.0 -36.2 480.7 480.7 217.1 217.1 263.6 41.4 144.7 186.1 0.0 0.0 403.2 77.5 2.5 2.5 2.5 0.4 0.4 80.4 35.4 45.0 2011 589.2 0.0 -41.2 548.0 548.0 247.5 247.5 300.5 47.1 165.0 212.1 0.0 0.0 459.6 88.4 2.8 2.8 2.8 0.5 0.5 91.7 40.3 51.3 2012 671.7 0.0 -47.0 624.7 624.7 282.1 282.1 342.6 53.7 188.1 241.8 0.0 0.0 524.0 100.8 3.2 3.2 3.2 0.5 0.5 104.5 46.0 58.5 2013 765.8 0.0 -53.6 712.2 712.2 321.6 321.6 390.5 61.3 214.4 275.7 0.0 0.0 597.3 114.9 3.7 3.7 3.7 0.6 0.6 119.2 52.4 66.7 2014 873.0 0.0 -61.1 811.9 811.9 366.7 366.7 445.2 69.8 244.4 314.3 0.0 0.0 680.9 130.9 4.2 4.2 4.2 0.7 0.7 135.8 59.8 76.1

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Balance Sheet 2005-2009

Cash and Short Term Investments Total Receivables, Net Total Inventory Other Current Assets, Total Total Current Assets Property/Plant/Equipment - Net Other Long Term Assets, Total Total Assets

2005 63.9 9.5 13.6 2 89.2 26.5 3.4

119.1

2006 82.4 17.8 17 3.4 120.6 30.7 3.2

154.5

2007 95.5 20.1 18.1 4.3 137.9 46.2 13.9

198

2008 9.1 31.1 22.7 6 68.9 147.9 3

219.8

2009 55.5 22.6 25.6 9.4 113 147 2.9

262.9

Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Other Current liabilities, Total Total Current Liabilities Other Liabilities, Total Total Liabilities Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity, Total Total Equity

11.4 15.6 0 3.4 28.7 4.3 33.1 0.1 70.8 15.6 -0.5 86

17.9 19.6 0 6.6 40.9 5 45.9 0.1 80.2 28.5 -0.2 108.6

17.7 20.4 0 44 60.2 4.2 64.4 0.1 88.8 44.9 -0.2 133.6

20.2 23.5 0 46.7 67.1 12.7 79.7 0.1 102.7 37.7 -0.4 140

25.3 21.4 0 54.2 73.8 16 89.8 0.1 111.7 61.7 -0.4 173.2

Total Liabilities & Shareholders Equity

119.1

154.5

198

219.8

262.9

Source: Global Business Browser / Reuters

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Key Employees
Name C. James Koch Martin F. Roper William F. Urich Thomas W. Lance John C. Geist David L. Grinnell David A. Burwick Position Chairman President & CEO CFO & Treasurer VP, Operations VP, Sales VP, Brewing Class A Director Board Executive Executive Executive Executive Executive Executive Non-Executive Non-Executive Non-Executive Non Executive Non-Executive Non-Executive
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Pearson C. Cummin, III Class A Director Charles Joseph Koch Jay Margolis Gregg A. Tanner Jean-Michel Valette Class B Director Class B Director Class B Director Class A Director

SWOT

Strengths Strong recent financial performance Robust network of breweries for local distribution Diversified in products and geographical distribution Strong market position Expanding market share Strong growth prospects

Weaknesses Much smaller player than most competitors Declining profitability Limited liquidity position Low return on equity Product recalls

Opportunities Focused strategy on reducing Dependencies on other brewers Production expansion Growing craft beer market

Threats Changing consumer preferences Limitations on advertising Stringent governmental regulations Consolidation in beer industry

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Financial Ratios

Boston Beer ROI Current Ratio Return on Assets 15.16%

AB Inbev 7.95%

SABMiller 8.36%

Heineken 9.26%

Industry 9.40%

1.53

0.76

0.65

0.78

1.87

12.90% 47.10%

5.20% 54.16%

5.00% 52.73%

5.60% 34.36%

6.19% 44.62%

Gross Margin

Source: Global Business Browser

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Final Notes

A large amount of information in this presentation was taken from the Boston Beer Company 2009 10k

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Sensitivity Analysis
COGS vs. SAM Share Value
70 Equity Value per Share ($) Equity Value per Share ($) 42% 44% 46% 48% 50% 65 60 90 85 80 75 70 65 60 55 50 45 20% 22% 24% 26% 28% 30%

Advertising vs. SAM Share Value

55
50 45 40 35 30 40%

COGS (% of Total Revenue)

Advertising Expenses (% of Total Revenue)

40