Boston Beer

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Boston Beer Equity Valuation Valuation Date: April 1, 2005

Jason Boney jboneyttu@yahoo.com Jordan Gristy jgristy@yahoo.com Preston Madden preston.e.madden@ttu.edu Heath Stanley charles.h.stanley@ttu.edu

Boston Beer Co. Equity Valuation
Table of Contents
Executive Summary Business and Industry Analysis Competitive Advantages Five Forces Model Industry Competitive Analysis Accounting Analysis Key Accounting Policies Degree of Accounting Flexibility Evaluation of Accounting Strategy Accounting Quality of Disclosure Red Flags Quantitative Analysis Ratio Analysis Liquidity Profitability Capital Structure Forecasting Balance Sheet Income Statement Statement of Cash Flows Forecast Summary Valuation Analysis Method of Comparables Valuation Tools Discounted Free Cash Flow Residual Income Long Run Residual Abnormal Earnings Growth (AEG) Conclusion of Valuation Work Cited Appendix 4

7 8 9 15 17 17 20 22 23 23 25 29 29 31 34 37 37 38 39 40 41 41 44 45 46 47 48 49 50 52

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Boston Beer Co.

By Valuation Proclamation Heath Stanley, Jordan Gristy, Preston Madden, Jason Boney

Investment Recommendation: Buy, Undervalued
Stock Ticker and Exchange Current Price (4-1-05) 52 week price range Revenue (2004) Market Capitalization Shares Outstanding 3-month Avg. Daily Volume Percent Institutional Ownership Book Value Per Share ROE ROA Est. 5yr EPS Growth Rate Cost of Capital Est. Beta Estimated 5-year -0.201 3-year 0.098 2-year 0.434 Published Beta 0.35 Kd WACC SAM-NYSE $22.14 $18.52 - $27.95 $239,680,000 $313,130,000 14,300,000 40,450 25% $5.52 15.95% 11.64% 2% Ke 5.29% 5.29% 3.67% 5.24 R2 .012 .003 .031 Debt Risk Altman Z-Score EPS Forecast FYE (12/31) EPS

4-28-05
3.49-Company considered safe

2004(A) $0.86

2005(E) $0.69

2006(E) $0.71

2007(E) $0.72

Valuation Ratio Comparison Forward P/E Forward P.E.G. Trailing P/E M/B Valuation Predictions Actual Share Price (7 April 2005) P/E Forward PEG Forward M/B Ford Epic Valuation Intrinsic Valuations Free Cash Flows Residual Income Abnormal Earnings Growth Long-Run Residual Income Perpetuity

SAM Comp.’s Avg. 25.7 16 2.5 1.55 23.8 20 3.82 6.715

$22.14 $13.76 $17.75 $12.62 $12.01

3.61% 4.79%

$41.25 $15.78 $38.51 $42.92

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Executive Summary
Recommendation- Buy, Undervalued After reviewing Boston Beer’s financial statements and data we believe the company to be undervalued. Using four forecasting models we found that three prices put Boston Beer’s value at around $40.00 which is well above the price of $22.14 on the date of April 1, 2005. Due to the recent growth in the better beer market and the low amount of debt the company has, we see a positive future for the company and believe that over time it may be able to grow and become a dominant player in the beer industry. Yet, as a whole, the beer market in general has been declining over the past few years which causes some alarm (though we do realize that declines come and go many times in this industry). Therefore, we believe if managed right the company may be able to grow substantially in their better beer market or at least maintain the hold of loyal customers that is has acquired over the years. Industry Demand Drivers Boston Beer’s demand in the past has come from drinkers who prefer higher quality beer with higher quality ingredients. As the better beer market continues to grow within the alcoholic beverage industry, Boston Beer will be able to attain a larger presence than what it once enjoyed. We believe that heavy advertising and the continued pursuit of better ingredients will allow new drinkers to emerge who enjoy the kind of quality that Boston Beer has to offer. It is understood that the beer market fluctuates over time, but it has not seen quite a growth within itself as it has with the “better beers”. Within the last few years the growth has maintained a stable average of approximately 3% within the alcoholic beverage industry and sees no looking back. As long as Boston Beer...
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