The Boston Beer Company, Inc Case Solution

1. What do you think of Boston Beer’s business model relative to the traditional beer companies’ business model, relative to Redhook and Pete’s? Hint: consider their brewing, production, distribution, marketing strategies. How is each firm attempting to achieve its own sustainable comparative advantage in the market place?)

Major Point of BBS’s strategy and its business model is contract brewing, which is focused on the transferring production functions to breweries based on careful selection of geographical regions and quality standards. Contract brewing created a huge competitive advantage by lower capital and overhead costs resulting in higher gross margins. This provided a great manufacturing flexibility and huge cash for intensive sales and marketing purposes. BBC also intended to remain as a contract brewer exclusively, capitalizing on lower overhead and transportation costs while continuing to invest heavily in branded products.

Redhook owned its own breweries and its major source of production was two technological advanced breweries in Fremont. Its strategic alliances with Anheuser-Busch and stronger distribution network provided a great competitive advantage for the company. Redhook believed that its long term growth and profitability were best served by assembling the largest company owned production capacity of any domestic craft brewer, guaranteeing production capacity in more than one geographic region of United States. Redhook also made a substantial investment in distribution, gaining access to Anheuser Busch’s nation-wide network of resellers.

Pete also operated as a contract brewer, but it was also producing at the company owned enterprises. It is building a brewery with its IPO money. Pete combined the both strategies and revolutionized its manufacturing, which could be a weak spot for companies in the future.

2. Evaluate Boston Beer’s performance relative to its peers (Compare BBC's ratios to the ratios of its peers in exhibit 4). (Hint: how do differences in operating strategies translate into differences in financial ratios? Are there any downside risks to BBC's contract brewing strategy?)

BBC’s focus on branded products along with lower costs in overhead and transportation costs is of great advantage, which has increased its net income. Sales have increased due to its investment related to marketing and sales. Its ratios would indicate positive positions keeping in view its increased sales, higher net income and its efficient usage of assets.

Asset turnover of the Redhook is quite low which indicates that Redhook carries huge assets as it depends on its own assets and own production. Assets values of Redhook at 30 September 1995 are $84.553 million. Pete and BBC have quite high asset turnover and are quite efficient in utilizing their assets. Their assets are quite low, and with higher net sales, their assets turnover is quite good.

BBC has lower financial leverage than Pete while Redhook has lowest financial leverage as its shareholder’s equity is huge. Return on Equity of BBC is much higher than its peer, which can be attributed to its excellent strategy based on contract brewing high quality standards, intensive sales and marketing.

By looking at the ratios of Gross Profit to sales ratio, return on equity, it can be said that contract brewing is of quite advantageous in this industry as it lowers the costs of goods sold. Net Sales of the BBC and number of the barrels sold are higher than its peers.

Average collection period of the company does not look good as compared to its peers while its average payable period is quite good which could be attributed to its excellent contract manufacturing. BBC sells higher number of barrels than Pete and Redhook which is due to its different business model, investment in intensive sales and marketing, higher quality standards and effective management of the whole value chain. By looking at the above ratios, it can be concluded that the business strategy and business model of the company has given a huge competitive advantage to the BBC, and it has resulted in healthy financial conditions and its performance relative to its peer can be rated quite good.

3. What is your assessment of the intrinsic value of Boston Beer’s stock at the time of the case? What should be its IPO price?

DCF valuation would be computed to calculate intrinsic value of Boston Beer’s Stock and its IPO price. WACC has been calculated to be around 13% after taking into account the adjusted equity. Risk free rate is government 30-Year Treasury notes 6.26% while risk premium has been assumed to be 7.2% as per historical annual spread between stocks and bonds returns. Sales growth has been quite high from 1992 to 1994, but nine months ended 1995 statement shows that rate would be decreased. Here, sales growth for next 10 years has been decreased at the interval of around 5%, and sustainable growth rate after the next years has been taken as 5%. Gross Profit varies directly proportional to the sales and is 54.09% of the sales. As BBC spends more on sales and marketing; hence, these expenses would grow at the growth rate of sales. Tax rate has been taken as an average rate from 1992 to 1994. Depreciation and Amortization and Capital Expenditures vary with sales at the average rates. Working Capital expenses would be around 3.48% of the sales similar to the base year 1994. Total enterprise value as a result of DCF valuation is $183.549 million. After taking out the debt of $1.95 million, intrinsic value of market value of the equity is $181.599 million. After dividing by the total number of shares, IPO price of the stock comes out to $8.725.

Another valuation which indicates the value of the total equity to be around $369.760 million; hence, stock price comes out to be $17.86 which is much higher than the value calculated through DCF method. DCF method does not take into account the positive outlook acquired through new investments and industry & competitive advantage, and it is mostly based on estimates of growth rates, which can be very high, resulting in higher intrinsic value and high IPO price.

4. Do you think the total market value of Redhook, Pete’s and Boston Beer makes sense given the total size and profitability of the beer industry and the craft-brewing segment?

DCF calculation shows that Earnings per share of the BBC is $0.36 per share while the stock price is $8.72. Hence, P/E ratio comes out be to 24.32.