Boston Beer Company Essay
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You are the investment banker assigned with the task of setting the IPO price for Boston Beer Company (BBC). Prepare a research report to support your recommendation. As you prepare this report, you may find that you would like to have more field information than what the case offers you. However, the case contains critical information that gives you a reasonable basis to compute its valuation. In addition use the following information for 1995. 1 Sales ($ millions) Redhook Pete’s BBC 25. 89 59. 17 151. 31 EPS . 75 . 25 . 40 Book value/share 7.
70 4. 33 3. 00 Price 27. 00 24. 75 ?
Also, use the following information for BBC for 1996. Make additional assumptions as necessary (and state any additional assumptions) to compute free cash flows for subsequent years: 1. The ratio of Net profit before taxes to sales is 12%. 2. Tax rate is 35% 3. For every dollar of increased sales BBC will increase working capital by 15% (or working capital will increase by $0. 15 for every dollar of increased sales) 4. Capex is 2% of sales 5. Depreciation is 2% of sales 6. BBC’s beta is 1. 2. Use BBC’s cost of equity as its WACC since its debt is a trivial part of its capital structure.
7. Analysts’ growth forecast for BBC and for the craft brewing segment in general is 30% per year over the next five years. Present the following: 1. Overview of the industry – competitive landscape, expected short-term and longterm industry growth, key players in the industry. Summarize the key facts from the case in about one to two paragraphs. Identify the closest peers to BBC. • Also, present as separate analysis of the relative growth of the craft brewing segment. Suppose the craft brewing segment grows at 30% per year for the next five years.
What would be the % share (as a % of barrels sold) of the craft brewing segment in the beer industry? What would be the % share of the craft brewing segment if this segment grows at a 30% per year rate for the next 10 years? How do you expect established players in the market to react if this segment of the market grows at these rates? Some of the information for Pete’s and Redhook given below differ from the case. Use the information here in your analysis. 1 2. Business description and a brief history of the company. Does the company have any unique strategic positioning within the industry?
– One paragraph 3. Present a qualitative assessment of the future outlook for the company. For example, are there any new products in the pipeline? Do you anticipate any competitive threats? Based on these developments, do you expect BBC’s growth and profitability to improve deteriorate, or stay about the same as in the past? 4. Revenue Forecasts and Free cash flow forecasts for the next ten years– • Specifically explain if you are forecasting revenue and FCF growths and profit margins that are significantly different from the company’s historical experience and why.
5. Present a DCF analysis and determine BBC’s intrinsic value. Assume that BBC’s Enterprise Value/ NOPLAT will be 18 ten years from now (check for sensitivities by assuming a multiple of either 15 or 20). 6. Present a valuation based on valuation ratios (P/B, P/E, P/S) for comparable firms. What price would you recommend based on these valuation ratios? Based on your recommended price, is BBC’s P/B ratio bigger or smaller than that of Redhook? Of Pete’s? Can you justify this difference? Do the same analysis for P/E and P/S ratios.
(Note: Suppose a particular valuation ratio for one firm is 25 and you recommend a corresponding valuation multiple of 35 for BBC. 2 Justify why BBC would command a higher valuation ratio. Justify the direction of the difference (higher or lower) and you do not have to precisely justify why BBC’s valuation multiple should be 35 rather than a different number, say 34. ) 7. Recommend an IPO price. 2 The numbers 25 and 35 that I use here are arbitrary, and I picked them only to explain the idea. Don’t attach any importance to these specific numbers.