1

Duke Investment Club

Boston Beer Co. (SAM)

Austin Lu, Seamus FitzPatrick, Zhou Fang, Vikas Kottamasu,

Sachin Mitra, Tim Evans

Investment Thesis

Boston Beer Co.’s share price doesn’t reflect the following headwinds:

1. SAM’s nonexistent exposure to growth markets

2. Increased competition in the craft beer space

3. Questionable recent share price movements

Current Dividend: 0%

Recommendation: SELL

Current Share Price: $159.87 (as of close 4/2/2013)

2014 target: $131.00 (19.8% upside to short)

Zhou Fang 2

Company Background

3 Austin Lu

• Largest craft brewer in the U.S.

• Approx. 1% of overall market

• Over 50 beers under the Samuel Adams /

Sam Adams brand names

• Twisted Tea “flavored malt beverages”

• Angry Orchard hard cider brands

• Above brands <1% of sales

• 97% of sales in North America

• Family company

• Cofounder and Chairman – Jim Koch

• Family owns ~30% of Class A shares and

100% of Class B Shares

• Controls 5/8 board seats

Market Growth Trends

-8.0%

-3.0%

2.0%

7.0%

12.0%

-

100,000

200,000

300,000

400,000

500,000

600,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

+/-

% a

nn

. g

row

th

1,0

00 h

l

Global Beer Production & Growth

North America Asia USA China

Data: Brewers Almanac

-1

0

1

2

3

4

5

CA

GR

Forecasted 2012-2016 Volume CAGR by Region

Volume % Growth

Source: Canadean, SABMiller

Austin Lu 4

Where is the growth?

5 Austin Lu

Industry Breakdown

6 Vikas Kottamasu

Major Brewers Encroach

7 Tim Evans

Craft Beer Industry

• 2012: Craft 15%, Overall Beer Market 1%

• 2012: Number of breweries increased 18%

• 6.5% share of the beer market by volume

– SAM comprises ~22%

8

Key Points:

Zhou Fang

Increasing Competition

9 Zhou Fang

Number of Breweries in U.S.: 420 (2006) +3600

Competition: Wine and Spirits

10 Zhou Fang

Beer Loses Market Share

11 Zhou Fang

Fast Growing Competition

12 Tim Evans

Key Points:

• SAM is not among top 10

• 5 of 10 are pure craft

• Other 5 are BUD

BEER Act

Key Points:

• Legislates definition of “small” brewer:

– Under 6 million barrels per year

– (Previously 2 million)

• Cuts excise tax from $7 a barrel to $3.50

• Cuts tax of $18 per barrel to $16 for

“small” brewers

• Strongly opposed by large breweries

13 Zhou Fang

SAM-Specific News

14 Vikas Kottamasu

Key Points:

• Invention of “Sam Can”

• Giving it away…for free

• “Freshest Beer” Program

• 12/12/2012 Call:

• “Timing of certain SG&A expenses”

• Twisted Tea hits the market

• 2/19/2013 Q42012 Call

• Can announcement

Implications - Industry

15 Tim Evans

How do overall beer market trends impact SAM?

• Zero exposure to fastest growing markets

• Competitors are far-better positioned to ride these trends

• Target market consumer preferences are shifting to wine and spirits

• Major breweries are aggressively entering the craft space

• Shock Top grew 116% in 2011

• SAM likely will lose market share in an already small segment

Craft

Everything else

There are thousands of breweries

competing for this slice!

Implications – Craft

16 Tim Evans

How do craft beer market trends impact SAM?

• Massive increase in competition severely threatens sustainable growth rates

• Fierce loyalty to regional brands

• Low barriers to entry for craft breweries

• Costco vs. Sam’s Quik Shop Analogy

Implications – News

17 Tim Evans

How do recent company-specific news items impact SAM?

• For Chairman Jim Koch, is Boston Beer Co. a hobby or a

business?

• Cans, hops…noble or competitive?

• Cans vs. Bottles – Who gets the shelf space?

• Cannibalization

• Koch’s Promise (2005 “Drinker’s Bill of Rights”)

• Sam Adams will never be put in cans

• “Freshest Beer”

• Threats to inventory / supply

SWOT Analysis

Austin Lu

Strengths

• Largest craft brewer

• Led craft revolution

• Experienced high growth

Weaknesses

• Zero exposure to growth markets

• Limited economies of scale

• Difficulty balancing craft tradition with business expansion

Opportunities

• Part of growing market

• Non-beer brands

• International expansion

Threats

• Shifting consumer preferences

• Explosive emergence of new breweries

• Major players entering craft market

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Share Performance

• Dec 12, 2012: SAM raised

its FY12 EPS estimate due

to increased shipment

volumes and the timing of

certain SG&A expenses

• SAM Share Price:

– Current: $159.87

– 52wk Range: 97.47 - 164.52

• Short % of Float = 24.2%

Seamus FitzPatrick 19

Share Performance

Seamus FitzPatrick

50% more valuable company since November, given these headwinds…?

20

Growth and Margins

Seamus FitzPatrick

Key Points:

• Craft Beer market growth

accounts for SAM’s revenue

growth

• SAM has lower gross margins,

operating margins, and EBIT

margins than BUD

• Price Competition:

• ABInbev:

• Shock Top etc.

• MolsonCoors:

• Blue Moon

• Multitude of pure craft

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2011 2012 2013 2014 2015

EBITM

argin

EBITMargin

SAM

BUD

TAP

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2011 2012 2013 2014 2015

Growth(y

oy)

RevenueGrowth

SAM

BUD

TAP

21

Price/Earnings

Seamus FitzPatrick 22

Relative Valuation

23 Seamus FitzPatrick

DCF Assumptions

Growth Assumptions

Revenue Growth (Annual) 14 (+.1)%

COGS Growth (Annual) 45 (+.2)%

Terminal Growth Rate 3%

Growth Period 10 years

WACC Assumptions

WACC 9.1%

Beta 0.84

Risk- Free Rate 1.85%

Market Risk Premium 8.6%

Vikas Kottamasu

WACC 9.1%

NPV of FCF $573.8

Terminal Growth Rate 3.0%

Terminal Value $2,869.4

NPV of Terminal Value $1,201.0

Enterprise (Equity) Value $1,774.9

Shares Outstanding 13.400

Equity Value / Share $132.45 (20% downside)

Perpetuity Growth Model Sensitivity Analysis

WACC

8.10% 8.60% 9.10% 9.60% 10.10%

2.00% $142.63 $129.93 $119.08 $109.70 $101.53

Terminal 2.50% $151.83 $137.42 $125.26 $114.85 $105.86

growth 3.00% $162.85 $146.26 $132.45 $120.78 $110.80

rate 3.50% $176.26 $156.82 $140.92 $127.68 $116.49

4.00% $192.94 $169.69 $151.06 $135.82 $123.12

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Intrinsic Valuation

Zhou Fang 25

Assumptions

Bull Expected Bear

Growth Rate: 15(+.2)% 14(+.1)% 13.00%

WACC: 9.10% 9.10% 9.10%

Terminal Rate: 3.00% 3.00% 3.00%

Base Case Target: $132.45

Risks to Thesis

26 Austin Lu

Main Risks:

Craft beer industry continues it’s incredible growth

• Long-Short: BUD

Consolidation in Industry – Acquisition Target?

• Unlikely family wants to sell out

Conclusion

Boston Beer Co.’s share price doesn’t reflect the following headwinds:

1. SAM’s nonexistent exposure to growth markets

2. Increased competition in the craft beer space

3. Questionable recent share price movements

Current Dividend: 0%

Recommendation: SELL

Current Share Price: $159.87 (as of close 4/2/2013)

2014 target: $131.00 (19.8% upside to short)

Vikas Kottamasu 27

Questions?

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Appendix - Comps

Boston Beer Company,

Inc., The (SAM)

Share

Price

Share

Price

52

Week

High

Market

Cap

Revenue Growth

Rate (%) Gross Margin EBIT Margin Debt/E

quity

Ratio

EV/EBITDA Price / Earnings PEG

Beta

Company

Ticker (US$) (US$)

(US$m

m) TTM 2013E 2014E TTM 2013E 2014E TTM 2013E 2014E TTM FY1

TTM FY1 FY2 2014E

AB Inbev BUD 98.44 96.9%

160,04

0 1.8% 5.7% 6.3% 58.6 59.2 60.2 33.8 33.2 35.0 107.78 40.7 11.7 21.9 20.9 18.4 2.5 0.84

Molson Coors

Brewing

Company TAP 51.36 97.0% 9,257 11.4% 13.7% 3.0% 39.9 36.8 37.0 25.7 23.6 24.4 58.59 12.7 9.7 20.9 12.7 11.9 2.8 0.78

Craft Brew

Alliance, Inc. BREW 7.46 83.6% 139 12.2% 9.8% - 29.9 - - 5.0 10.0 - 12.31 7.7 8.2 56.7 27.3 25.0 - 0.87

SABMiller PLC SAB 12.4% 29.2% 6.3% 47.7 56.0 56.2 30.9 22.8 24.0 73.58 38 10.9 20.0 22.2 19.7 2.0 1.01

Heineken HEIA 7.4% 11.6% 4.5% 43.3 40.9 42.7 21.6 15.6 16.3 114.27 28.5 10.4 11.6 18.4 16.4 1.8 0.67

Mean 52.42 92.5% 56,479 9.0% 14.0% 5.0% 43.9 48.2 49.0 23.4 21.0 24.9 73.31 25.5 10.2 26.2 20.3 18.3 2.3 0.83

Median 51.36 96.9% 9,257 11.4% 11.6% 5.4% 43.3 48.5 49.5 25.7 22.8 24.2 73.58 28.5 10.4 20.9 20.9 18.4 2.3 0.84

High 98.44 97.0%

160,04

0 12.4% 29.2% 6.3% 58.6 59.2 60.2 33.8 33.2 35.0 114.27 40.7 11.7 56.7 27.3 25.0 2.8 1.01

Low 7.46 83.6% 139 1.8% 5.7% 3.0% 29.9 36.8 37.0 5.0 10.0 16.3 12.31 7.7 8.2 11.6 12.7 11.9 1.8 0.67

Boston Beer

Company, Inc.,

The SAM 156.00 94.8% 2,014 13.1% 13.6% 10.5% 54.3 53.9 54.4 16.5 16.2 16.6 0.26 - 15 35.7 31.4 27.5 2.6 0.82

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Appendix - DCF

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