Boston Beer Company Essay

Address the following questions in a 4-5 page write-up of the Boston Beer Company Case to explore the issue of Initial Public Offerings. 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? ) 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? ) 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? (Some hints below: First, you should look at the P/E multiples for Pete’s and Redhook around the IPO time for BBC. You should also look at the average amount the price seems to jump on the day of the IPO, and the EPS of BBC for 1994 and 1995. From this, you should figure out what the implied price per share for BBC should be in this market environment. Second, you should try to justify this price per share by doing FCF analysis. Create a ten year pro-forma spreadsheet, projecting out barrels of beer each year, revenue per barrel, revenue, costs, taxes, etc. Calculate net income, then subtract out net investments and add back depreciation to obtain FCF each year. Don’t forget to calculate terminal value at the end of 10 years. Use a 4% growth rate after year 10. Calculate the cost of equity and then discount the free cash flows by this discount rate. Calculate the Present Value of these FCFs plus the present value of the terminal value. To find the implied price, divide this present value by the new # shares outstanding, 19. 182mm. To determine the new market value of the firm, multiply the implied price by total number of shares outstanding. Are your assumptions about growth in unit sales realistc or over-optimistic? Using REALISTIC growth assumptions, what price per share do you get?). 4) Do you think the total market value of Redhook, Pete’s and Boston Beer (at your proposed IPO price) makes sense, given the total size and profitability of the beer industry, and the craft-brewing segment? What profitability and growth assumptions are necessary to justify the total market value of these three craft brewers? (Hint: First determine the total market value of these three companies. Then figure out what the average after tax operating profit margin is for these three companies. Figure out what the value of these three companies would be if their after tax earnings continued forever, but did not grow at all. Then take the difference between their total Market Value and this (no growth) perpetuity value. This difference reflects the market value due to GROWTH. Try to figure out what growth rate in revenues is implied here by projecting total revenues for 10 years, and finding the after tax earnings for 10 years, and then discounting the after tax earnings at the cost of equity. Don’t forget to calculate the terminal value (grow earnings at 4% after year 10.). 5) In late December 1995, sell-side analysts were forecasting long-term growth of 25-40% for the craft-brewing segment. How achievable are these growth targets? What factors are likely to influence analysts’ growth forecasts? (Hint: Is the implied growth rate in revenues found in (4) realistic? What would you consider a realistic growth rate for the craft brewing industry? At this growth rate, what would be the implied market value of these three firms? What do you predict will happen to the market prices of each of these three firms in the short to medium term? ).