April 6, 2017
Analysts
HonglinDiao
Nicolás Villarreal Daza
Jeffrey Joe
The Boston Beer Company Recommendation
(NYSE: SAM)Watchlist
Current Price:$144.65 on 3/31/2017 EPS: $6.79
52 Week High: $195.35 Market Cap: $1.71B
52 Week Low: $139.45 Trailing P/E: 20.66
Company Profile and Business Model
Boston Beer (SAM) used to be the best performing publicly traded stock in the US Beer market for almost 8 years (measured in yearly stock price change). However, starting in 2015, thanks to the M&A activities of Anheuser-Busch and the rise of small local craft breweries, SAM’s performance has reversed, losing market share and experiencing negative sales growth. Moving forward, the company faces the challenge of returningto the high ground and becomingthe leader again in the craft beer sub industry. Management is targeting heavy marketing investments as their main strategy to achieve this objective. Inorganic growth is also an option.
Macroeconomic and Industry Review
SAM competes in what is called the craft beer (or better beer) category within the beer industry. Although it has almost 20% of the craft beer market, it is a small player when compared to the international conglomerates in the total beer market such as Anheuser-Busch (almost 50% of US market share) and Molson Coors (12% of USA market share). According to IBIS World reports, the beer industry is expected to grow 4.5% and the craft beer category may grow up to 7% in the upcoming 5 years. We believe SAM will struggle to achieve these growth rates and will experience below market average growth.
Financial Analysis and Valuation
In 2016 Boston Beer compared favorably with its competitors on several metrics including return on equity, current ratio, and asset turnover, but it posted negative revenue growth due to a more competitive environment in the craft brewery industry. For the valuation, we considered two scenarios, optimistic and pessimistic, for the DCF analysis because it was unclear whether the company could successfully maintain its current market share under such intense competition. Besides, we believed that investors deserved higher returns rather than just accepting the 10.4% return which was calculated based on the book approach. When combining all these assumptions together using a DCF model and considering the multiples valuation, we geta one-year target price of $127 which is below the current market price. Thus, we think that the market is overvaluing this company. However, the market has realized its overvaluation and the price has been following a downward trend asshown by its decrease of 21.4% over the past twelve months.
Recommendation
We recommend that Boston Beer be incorporated into the watchlist.