Boston Beer Company. Investment Thesis. Key Statistics. Trading Statistics. Margins and Ratios. May 10 th, Consumer Goods.

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1 Consumer Goods Boston Beer Company Ticker: SAM Current Price: $ Recommendation: Hold Implied Price: $ Key Statistics 52 Week Price Range 50-Day Moving Average $ $ $ Estimated Beta 0.71 Dividend Yield 0.00% Market Capitalization m 3-Year Revenue CAGR 11.50% Trading Statistics Diluted Shares Outstanding 13.28m Average Volume (3-Month) $ $ Investment Thesis Boston Beer Company is the largest craft brewer in the United States with a market share of over 19.0% and a three year revenue CAGR of 9.2% Implementation of Samuel Adams in a can will act as a new sales driver to increase market share while simultaneously cutting long term costs Increased competition from large international brewers and smaller microbrewers is saturating the craft beer market and is presenting Boston Beer Company with unprecedented competition necessitating an increase in advertising and selling expenses It is unclear at this point as to how Boston Beer Company will react to the increase in competition, especially seeing the negative effect that it recently had on earnings Five-Year Stock Chart 1,800,000 1,600,000 Institutional Ownership 102% Insider Ownership 2.56% EV/EBITDA (LTM) Margins and Ratios Gross Margin (LTM) 54.33% EBITDA Margin (LTM) 19.98% Net Margin (LTM) 10.25% Debt to Enterprise Value $ $ $ $80.00 $60.00 $40.00 $20.00 $0.00 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Volume Adjusted Close 50-Day Avg 200-Day Avg 1,400,000 1,200,000 1,000, , , , ,000 0 Covering Analysts Mike Saeks Nick Hubert mikesaeks@gmail.com nhubert@uoregon.edu 1 University of Oregon Investment Group

2 Business Overview Figure 1: Samuel Adams Product Examples General Overview Boston Beer Company began in the attic of founder Jim Koch s home using a family recipe passed down from the 1800 s. Koch sold the first Samuel Adams beer in April 1985 and had sold almost 500 barrels before the year was over. Boston Beer opened its first brewery in Boston in 1988 and has since opened several more across the country. It was taken public in 1995 and trades on the New York Stock Exchange under the ticker SAM. Boston Beer Company is headquartered in Boston, Massachusetts. Today, Boston Beer Company competes in the Better Beer subsector of the beer industry and is the largest craft brewer in the United States having sold over 2.7 million barrels of beer in Better Beer is made up of craft brewers, microbrewers, and other domestic specialty beers. Products Source: Samuel Adams Website Figure 2: Core Brand Revenues $1,000,000.0 $900,000.0 $800,000.0 $700,000.0 $600,000.0 $500,000.0 $400,000.0 $300,000.0 $200, A 2013E 2014E 2015E 2016E 2017E Source: SAM Financials and UOIG Projections Boston Beer Company sells products under two categories: core brands and noncore brands. Core brands consist of the following product lines: Samuel Adams, Twisted Tea, and Angry Orchard. The non-core brands are brewed and packaged under contract from various third parties and made up roughly 92% of shipments in Samuel Adams The Samuel Adams product line is the core product for Boston Beer Company, and its success is mainly driven by sales of Samuel Adams Boston Lager and Samuel Adams Seasonal Beers. Additional products have been added to the line over the years, and Boston Beer currently sells over fifty beers under the Samuel Adams name. According to Boston Beer, sales volume within the craft brew industry grew by roughly 12% in 2012 compared to the total beer industry which grew by just 1%. Twisted Tea Boston Beer s Twisted Tea is sold in the flavored malt beverage category and competes with brands such as Mike s Hard Lemonade, Bud Light Lime, and Smirnoff Ice. The first Twisted Tea product was released in 2001, and the company currently sells ten different products under the Twisted Tea brand name. According to Boston Beer, the flavored malt beverage category currently makes up roughly 2% of United States beer consumption. The category s popularity has been increasing over the past few years and sales volumes increased by 9% in Angry Orchard The Angry Orchard product line was launched in 2011 and competes with other ciders and various spirit brands. The Company currently sells 5 hard ciders under the brand Angry Orchard, and it estimates that hard cider makes up approximately 0.5% of United States beer consumption. Despite its small size, this category is expanding rapidly and experienced growth of around 65% in UOIG 2

3 Breweries Figure 3: Brewery Logo Boston Beer Company continually invests in capital improvements for its breweries in order to produce higher quality products that can meet the capacity requirements demanded by consumers. The Pennsylvania Brewery is the Company s largest and produces a significant amount of its core brand barrels. The Cincinnati Brewery also produces a large amount of core brands barrels, and focuses on smaller specialty releases as well. The Boston Brewery is focused on the development of new products for Boston Beer and is the main producer of the Samuel Adams product line. The Company recently opened the Angel City Brewery in Los Angeles, California which is geared towards capturing area specific demand for specialty craft beers. Source: Google Images In 2011, Boston Beer created a Vermont based subsidiary called Alchemy and Science. Alchemy and Science is tasked with identifying innovative and unique products for Boston Beer and is focused on the research and development of new brewing techniques to be applied in new geographic areas. The Angel City Brewery is an example of one of Alchemy and Science s developments. Strategic Positioning Sales and Distribution $1,100,000.0 $1,000,000.0 $900,000.0 $800,000.0 $700,000.0 $600,000.0 $500,000.0 $400,000.0 $300,000.0 $200,000.0 $100,000.0 $0.0 Figure 4: Advertising, Selling, and Promotional Expense relative to Revenue 2012A 2013E 2014E 2015E 2016E 2017E Advertising, Promotional, and Selling Expense Revenue Source: SAM Financials and UOIG Projections The relationship between brewers, distributors, and retailers is extremely important in the beer industry. Therefore, Boston Beer constantly works to develop its network of distributors and currently sells to 340 wholesalers. These wholesalers then sell to grocery stores, restaurants, and other convenience stores. Quality control and freshness is a constant problem that plagues the beer industry throughout the entire distribution process. As a result, Boston Beer Company released the Freshest Beer Program in Essentially, the Freshest Beer Program focuses on reducing wholesaler inventory levels by providing more timely deliveries, more efficient forecasting, and more accurate planning of shipments. By the end or 2012, Boston Beer had 89 wholesalers participating in the Freshest Beer Program equaling roughly 59% of its shipments. The Company s 2013 goal is to increase this number to roughly 70% of all shipments. The Company hopes that successful implementation of the Freshest Beer Program will increase depletions and lead to more shipment growth. Depletions are important in the beer industry and represent the time that it takes for beer to get from distributors to consumers. As a result, higher depletion represents higher demand for a company s product. Boston Beer Company prides itself on its knowledgeable sales force which currently consists of 330 people. The sales force focuses on each part of the distribution process and constantly seeks to increase the education of the brewing industry. Each member of the team is highly trained and familiar with the Company s brewing process. They also carry the individual inputs such as the hops, barley, and apples in order to showcase the quality of Boston Beer products. The team differentiates itself by promoting the quality of the inputs and by focusing on education of the brewing process. Success in the alcohol industry is dependent on the ability to engage with customers. For this reason, Boston Beer continues to increase its advertising budget with the goal of increasing its reach and its customer base. The Company commonly deploys national media campaigns through means such as television, UOIG 3

4 Figure 5: Samuel Adams Can Promotion Source: Samuel Adams Website billboards, radio, and various other print strategies. It also increases promotion at the community level by sponsoring beer festivals, community events, and trade shows. Through all of these means, Boston Beer hopes to increase first time sales by promoting quality awareness. The Drinking Experience The Boston Beer Company is constantly searching for new ways to increase the drinking experience for its consumers. Over the past couple of years, the Company has worked through more than ten prototypes in order to offer Samuel Adams in a can for the first time. By focusing on quality and freshness, Boston Beer hopes to maintain the flavor provided by a bottle while, at the same time, offering the ease of a can. Additionally, according to IBIS World, cans make up roughly 54% of beer sales versus bottles which come in at 36%. This represents the huge opportunity for sales growth by shifting towards the sales of canned beer. The new product will launch by the end of May 2013, and will be marketed towards more can friendly locations such as sporting events and airlines. Overall, this new offering represents an attempt to push back against the increasing pressure of the larger brewers and to increase the scope of the Samuel Adams marketplace. Business Growth Strategies Historical Acquisitions Boston Beer Company has made a few notable acquisitions in the past. In 2012, the company acquired brewing assets of Southern California Brewing Company for $1.7 million in order to open the Angel City Brewery. Additionally, Boston Beer acquired the assets to open its Pennsylvania Brewery from Diageo North America for $35 million in Analysis of this trend shows that the Company s acquisition strategy is mainly focused on the purchase of assets with the goal of expansion into new geographic territories. Boston Beer historically has not acquired other brands and is not likely to do so in the future. Figure 6: Industry Product Sales Breakdown Bottles 36% Draft Beer 10% Source: IBIS World Metal Cans 54% Forward Growth Looking ahead, Boston Beer will continue to grow through organic means. The management has not expressed intentions to acquire new assets at this point in time, and will continue to focus on developing the brands already owned by the Boston Beer Company. The creation of Alchemy and Science further enforces the fact that the Company is focused on developing product internally now more than ever. This trend can be expected to continue as brands such as Twisted Tea and Angry Orchard continue to develop and gain popularity. Another previously mentioned example of organic growth is SAM s new venture in to can production. The Company hopes that the introduction of Samuel Adams in a can will increase the scope of sales and open up the opportunity to sell its product at a wider array of events. Growth in this industry is often extremely difficult as companies struggle to achieve economies of scale and reduce costs efficiently. Regardless, Boston Beer has a strong record of successful growth and will continue to grow on its own into the future as it continues to capture a large amount of market share in the expanding craft brew industry. Boston Beer is mainly focused on growth within the United States; however, the Company will continue to test certain markets such as Canada, the Caribbean, UOIG 4

5 Figure 7: Overall Industry Market Share certain European countries, and Mexico. Due to the tough laws surrounding international brewing and the costs of transportation, SAM will continue to focus its efforts towards being the most successful craft brewer in the United States. Industry Overview Other 25% AB InBev 42% MillerCoors 33% The brewing industry is mature and highly concentrated, but it has seen strong growth throughout the past five years as consumer preference shifted following the 2008 financial crisis. A decrease in disposable income drove consumers towards lower priced beers instead of wines and spirits resulting in increased revenues for the major brewers. Increased sales during weak economic times are a common trend for breweries and continue to be an identifier of the resilience in this industry. Coming out of the recession the lower end brewers will see a decrease in sales as consumer preferences shifts back towards premium beers, wines, and spirits. Barriers to entry for the larger breweries is quite high as significant capital investments are required in order to realize economies of scale. Furthermore, the larger firms are able to leverage beneficial pricing relationships with suppliers that smaller breweries cannot attain. Source: IBIS World Figure 8: Craft Brewing Market Share Other 75% Sam Adams 19.3 Source: IBIS World Sierra Nevada Brewing Company 5.8 The desire to achieve economies of scale in distribution and manufacturing has led to a large amount of consolidation amongst the largest brewers in the industry. Most notably, in 2008 Anheuser-Busch merged with InBev to form AB InBev. Next, Coors Brewing Company merged with SABMiller to form MillerCoors. Together, these two companies now hold more than 75% of US beer market share. Despite the massive consolidation, Boston Beer Company finds itself in the unique craft brewing sector of the industry that is much less dominated by the larger firms. Craft Brewing The craft brewing sector of the industry is much more focused on high quality products, and firms rarely compete on price. As mentioned previously, premium beers are well positioned for increasing growth as consumer preferences shift coming out of the financial crisis. Also, as consumers become more health conscious, the market will likely see a shift towards premium beers which are often viewed as healthier than lower end beers. The sector is much less concentrated than the rest of the brewing industry. According to SAM s research, the craft brewing sector grew approximately 11% in 2012 compared to the mere 1% growth of the overall industry. Boston Beer currently holds roughly 19% of the market share within this industry with the next closest competitor, Sierra Nevada Brewing Company, holding only 6%. However, this market share has been slowly decreasing and will continue to decrease as more companies find it profitable to enter this space. Craft brewers operate on a much smaller scale than the giants in the industry meaning that they often have higher input costs. Economies of scale in regards to manufacturing and distribution are extremely tough to achieve at such a small scale. Therefore, barriers to entry for craft brewers are often much smaller than those of the larger brewers. Companies within the industry are well poised to see margin expansion as more consumers shift demand towards premium beers. The culmination of these factors has led to an increasingly competitive landscape for Boston Beer Company which is reinforced by its recent increase in advertising and selling expenses in the first quarter. UOIG 5

6 Figure 9: Large Scale Competition Competition As stated, the craft brewing industry has a low concentration which opens the door for heavy competition. Craft brewing is not price competitive, but focuses instead on developing high quality, unique, and flavorful beer that aligns closely with the desires of the consumer. Success in craft brewing is highly dependent on a firm s ability to reach its consumers. For this reason, it is common to see large advertising expenses among companies in this industry in order to fuel high growth and to capture market share. Brand loyalty is also extremely high among beer companies, so investing in advertising and marketing can often be one of the most effective strategies for capturing long term growth. The increasing success and profitability of companies within the craft brewing sector has led to an influx of smaller microbreweries which are quickly turning into tougher competition for Boston Beer Company. Source: Google Images Figure 10: Microbrewery Competition Source: Ninkasi Website The Company is being squeezed on both sides for market share. Below them are the microbreweries which are continuing to increase in both size and number. Microbreweries are easier to establish and offer high quality products that directly compete with the product offerings of SAM. Large margins and high profitability are driving firms to enter the market at a rate that has not been seen previously. As a result, pressure on SAM is going to increase for them to maintain a high growth rate and maintain high quality products at the same time. Increased investment in advertising has been and will continue to be a necessity for the Company to maintain its growth and its brand loyalty. Larger companies such as Constellation Brands, AB InBev, and SABMiller are also pressuring Boston Beer from above as they attempt to launch products into the craft brewing sector. These companies are looking to leverage their cost efficiencies which, when paired with the higher prices demanded by premium beers, will increase margins and bottom line profitability. It is important to note that premium beer competes intensely with spirits and wines. These products are very different, but are aligned more closely in the consumer mindset than low end products offered by the larger brewers. They are priced similarly and will continue to provide tough competition for SAM in the future as consumers increase spending power Figure 11: Per Capita Disposable Income Source: IBIS World Macro Factors The beer industry is often viewed as counter-cyclical due to the fact that low end beer consumption often increases when the economy decreases. Premium beer, such as that produced by Boston Beer Company, to a lesser extent falls into this trend as well. However, premium beer has a much larger potential on the upside as consumers shift preferences in line with economic recoveries. This potential will most likely be realized as per capita disposable income increases along with the economy. Per capita disposable income is projected by IBIS World to grow at a compound rate of roughly 2.4% through 2018 compared to the contraction of growth that was seen following the financial crisis. Boston Beer is positioned well to take advantage of the increasing disposable income as it continues to compete with other firms for market share. Additionally, increasing per capita disposable income will result in increased per capita alcohol consumption. Alcohol consumption is only projected to increase.6% through 2017 to an average 25 gallons per capita; however, premium beers will likely see a much higher compound growth rate during this time period. UOIG 6

7 $38,000 $37,000 $36,000 $35,000 $34,000 $33,000 $32,000 $31,000 $30,000 $29,000 $28,000 University of Oregon Investment Group Figure 12: Per Capita Alcohol Consumption Source: IBIS World Figure 13: Consumption by Age Group Changing consumer preferences will continue to drive growth for premium beers. Specifically, the increasing focus on healthy and sustainable practices works in favor of craft brewers which are often viewed as healthier. Microbrewers and craft brewers focus on alignment with consumer preferences more so than the larger brewer which has greatly increased their popularity in recent years. Craft brewing growth is mainly being driven by demand from the younger demographic of consumers. These consumers demand the unique and high quality beer that is produced by craft brewers and will continue to be the main growth drivers for this sector in the coming years. Additionally, their spending power will continue to increase in line with the increasing per capita disposable income following the recovery from the financial crisis. The size of firms in the craft brewing sector means that they are often not able to apply any significant power to suppliers. Furthermore, the volatility of input prices resulting from supply fluctuations can create difficulty in regards to cost control and forecasting. Boston Beer has not had significant issues with this in the past, and the Company works closely with its suppliers to identify issues before they arise. However, SAM uses very specific ingredients for its products that often have very few suppliers. For example, the Noble hop that is used in most Samuel Adams beers is sourced primarily from Germany and the Czech Republic. These hops are rare and expensive, meaning that Boston Beer is often at the will of suppliers in terms of price and quantity available. Also, the expansion of the Company s product line to include cider opens it up to even more volatile ingredients. The Company does not currently engage in hedging activities against the commodity markets, but it is well aware of the effect that price fluctuations could have on its profitability. Management and Employee Relations Jim Koch, Founder and Chairman of the Board of Directors % % 64 and older 10% % % % Jim Koch was the original founder of the Boston Beer Company, and he continues to be the visionary that drives the success of the company each year. He served as Chief Executive Officer of the Company until Mr. Koch currently controls 100% of all Class B commons stock which gives him a large amount of influence over the election of the board, executive compensation, and various other governance matters. His control of the board translates to significant control over the direction of the Company. As founder, he is the figurehead of the company and will continue to be popular among drinkers going forward. Such reliance on one member exposes the Company to a large amount of risk if that member is no longer able to function in a significant leading role. However, the chances of that happening are unlikely, and Jim Koch s desire to build the leading craft brewer in the world will continue to steer the company towards the top of the industry. Martin Roper, CEO and President Source: IBIS World Mr. Roper has a strong operational and manufacturing focus which has proven to be very useful in the brewing industry. He joined Boston Beer in 1994 as the VP of Manufacturing and Business Development. In 1997, he was promoted to Chief Operating Officer, and he took over as Chief Executive Officer in January 2001 when Jim Koch stepped down. Mr. Roper holds a master s degree in engineering and manufacturing as well as a MBA from Harvard Business School. UOIG 7

8 William Urich, CFO and Treasurer Mr. Urich brings more than twenty years of financial and operating experience to Boston Beer Company. He has been focused in the alcohol industry for the majority of his career having worked for a subsidiary of Diageo and an organic food producer. Mr. Urich took over as CFO and Treasurer at SAM in 2003, and he continues to be a strong leader for the company % 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2.6% $1, % Figure 14: Company Performance and CEO Compensation 58.4% 11.3% $1, % 62.2% 7.2% $ % 6.0% 12.6% $1, % % $1, $1, $1, $ $ $ $ Bonuses and Incentives The bonus program at Boston Beer is aimed at rewarding executives for high performance. Specifically, the Company rewards its executives for hitting short term sales targets and for driving towards long term goals. As shown in figure 14, executives are awarded most when the company is performing at its best. Depletion, increasing flow of product from wholesalers to retailers, is an integral part of success in this industry, and the incentives system was created to drive the Company s success. Management Guidance depletion growth gross amrgin EPS growth CEO Compensation(thousands) Source: SAM Proxy Statement Historically, management has provided easily makeable guidance for earnings and EPS. For this reason, the generally do not have to adjust guidance down. As of the most recent quarter, they were inaccurate in predicting advertising expenses which caused them to miss earnings. Regardless, they reiterated their annual estimates and are very optimistic about the earnings potential of both Boston Beer Company and the craft beer industry as a whole going forward. Figure 15: Shift to Premium Beers Recent News Forbes: Imported Beers Corona and Heineken, along with Sam Adams, Beating Big Names like Bud and Coors. May 7, 2013 In this article, Forbes discusses the shift of the beer industry towards the more premium beers such as Samuel Adams and Corona. Specifically, it addresses the fact that the larger beer companies such as Anheuser-Busch and SABMiller are beginning to lose market share as the consumer trends continue to shift. Source: Grupo Modelo AP: Boston Beer weighed down by expenses in Q1 May 1, 2013 AP discusses the most recent earnings and the challenges that Boston Beer Company has been facing in regards to expenses. The Company was hit with higher costs than they anticipated for certain goods. More importantly, Boston Beer spent more on advertising and selling than anticipated which further reinforces the fact that they are facing increased competition in the industry. Catalysts Upside Success of SAM s can launch will increase market share and shipments Increasing consumer preference towards craft beer Accelerating growth of craft beer sector relative to the industry Successful implementation of the Freshest Beer program to drive depletions Possibility to increased margin expansion through economies of scale UOIG 8

9 40.00x 30.00x 20.00x 10.00x 0.00x Figure 16: Monster EV/EBITDA and EBITDA Margin 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Downside Increasing cost of production inputs Increased competition from largest brewers trying to enter the sector Increased competition from microbreweries Possible market saturation due to new entrants Inability to leverage shelf space away from largest brewers Comparable Analysis Comparable Companies were chosen based on multiple factors including: forward EBITDA growth rates, forward revenue growth rates, exposure to distribution risk, size, product offering, and brand equity. Many companies within the brewing industry did not fit these requirements which lead to the inclusion of multiple companies from outside the industry. EV/EBITDA EBITDA Margin Source: Factset Figure 17: Molson Coors EV/EBITDA and EBITDA Margin 25.00x 25.00% 20.00x 20.00% 15.00x 15.00% 10.00x 10.00% 5.00x 5.00% 0.00x 0.00% EV/EBITDA EBITDA Margin Source: Factset Monster Beverage Corporation: MNST (40.00%) 1Monster Beverage Corporation operates in the alternative beverage industry. It develops, markets, and sells various beverage products under the names Monster Energy, Peace Tea, Hansen s, Blue Sky, and Vidation. The Company sells its products directly to retailers, wholesalers, and distributors internationally. Monster Beverage Corporation was chosen as a comparable company due to its similarity in both revenue and EBITDA growth rates to SAM. Additionally, it has similar exposure to beverage specific risks such as distribution and transportation. The Company also relies heavily on the development of its brand equity to be successful and is a similar size to Boston Beer. It was given the highest weighting of 40% due to its similarity in all of these areas. Molson Coors Brewing Company: TAP (25.00%) Molson Coors Brewing Company operates in the alcoholic brewing and sales industry. It brews and sells a wide variety of beer focused mainly in North America. The Company focuses mainly on lower end beer such as Coors Light, Miller Lite, Keystone, and Amstel Light. Molson Coors holds a significant amount of brand equity in the lower end beer market x 25.00x 20.00x 15.00x 10.00x 5.00x 0.00x Figure 18: Starbucks EV/EBITDA and EBITDA Margin 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Molson Coors was chosen as a comparable company due to its similar revenue growth rates. Furthermore, the Company is exposed to many of the same risks as SAM by participating in the brewing industry. It has a significant amount of brand equity in the industry and operates on a large advertising budget. It was given a weighting of 25% due to its similarity in these categories. Starbucks Corporation: SBUX (25.00%) EV/EBITDA Source: Factset EBITDA Margin Starbucks Corporation operates in the beverage industry. The Company roasts, markets, and sells coffee internationally. It sells various products such as espresso, cold blended beverages, teas, regular coffee, and packaged beans. UOIG 9

10 200.00x x 0.00x x x 25.00x 20.00x 15.00x 10.00x University of Oregon Investment Group Figure 19: Craft Brew Alliance EV/EBITDA and EBITDA Margin EV/EBITDA EBITDA Margin Source: Factset 20.00% 10.00% 0.00% % % % % Figure 20: Constellation EV/EBITDA and EBITDA Margin 5.00x 0.00x EV/EBITDA EBITDA Margin Source: Factset 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Starbucks Corporation offers its products through more than 18,000 stores worldwide. 3Starbucks Corporation was chosen as a comparable company due to its similarity in both revenue and EBITDA growth rates. The Company has a large amount of brand equity worldwide and sells to many of the same customers as Boston Beer. Based on these reasons, Starbucks was weighted 25%. Craft Brew Alliance BREW (5.00%) Craft Brew Alliance operates in the craft brew sector of the alcoholic brewing industry The Company brews and sells craft beer under the names: Widmer Brothers, Redhook, Kona, and Omission. It sells its products directly to consumers and through various other distribution methods. The products offered by Craft Brew Alliance directly compete with the Samuel Adams line of products. The Company s revenue growth was similar to SAM s; however its EBITDA growth was not representative of Boston Beer looking forward. The Company operates at a similar size to Boston Beer and is reliant on the development of its brand equity to drive sales growth. BREW is the most similar competitor to SAM, but its significant difference in EBITDA growth resulted in its lower weighting of 5%. Constellation Brands: STZ (5.00%) Constellation Brands operates in the brewing and sales of alcoholic beverages including beer, wine, and spirits. The Company operates in the United States and internationally selling products such as Corona, Pacifico, and SVEDKA Vodka. It sells its products mainly through wholesale distributors and directly to retailers. Constellation Brands operates very similarly to Boston Beer Company and sells premium brands that compete closely with the Samuel Adams line of products. The Company is exposed to similar distribution risks and operates on a large advertising budget that drives development of brand equity. It is very similar to SAM in many aspects; however, it was only weighted 5% due to its extremely high 2013 growth rates resulting from its acquisition of the remaining share of Grupo Modelo x 40.00x 30.00x 20.00x 10.00x Figure 21: Green Mountain Coffee Roasters EV/EBITDA and EBITDA Margin 0.00x EV/EBITDA Source: Factset EBITDA Margin 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Green Mountain Coffee Roasters: GMCR (0.00%) Green Mountain Coffee Roaster competes in the beverage industry and is a producer of specialty coffee in the United States and Canada. The company sells mainly to retailers. It sells products such as single serve packs, whole bean coffee, and ground coffee. Green Mountain Coffee Roasters was originally included as a comparable company to capture its high growth rates and premium product offerings. The Company is also a similar size to Boston Beer Company. Ultimately, it was decided that Green Mountain Coffee Roasters was not an appropriate comparable company due to its significant difference in growth rates and its UOIG 10

11 Terminal Year G&A as a % of Revenue Terminal Year AP&S as a % of Revenue Terminal Year COGS as a % of Revenue University of Oregon Investment Group overall difference in distribution strategy. For these reasons, it received a 0% weighting. $1,100,000.0 $1,000,000.0 $900,000.0 $800,000.0 $700,000.0 $600,000.0 $500,000.0 $400,000.0 $300,000.0 Figure 22: Total Revenue 2012A 2013E 2014E 2015E 2016E 2017E Source: SAM Financials and UOIG Projections Implied Price Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 40.00% % % % % Discounted Cash Flow Analysis Revenue Model Revenue in the brewing industry is driven by the number of barrels shipped. Boston Beer generates over 90% of its revenues from core brand shipments. These shipments were projected to increase in line with management estimates of 10-15% in This growth was then trended down through the projected period. The resulting number of barrels sold was then multiplied by the average revenue per barrel to arrive at a total core brand revenues. Management expressed that average revenue per barrel is project to increase at up to 2% over the next year. Therefore, this was projected at a conservative 1.5% which was trended down to just 1% in the terminal year. Non-core brand revenue has not grown consistently historically; however, it has been decreasing as a percent of total revenue since This decrease was built into the projection to end at roughly 7% of total revenue. Income Statement Excise Taxes As a brewery, the Boston Beer Company must pay excise tax on all alcoholic beverages it sells. The excise tax rate varies based on the type of alcohol sold and the state in which it is sold. Excise Taxes was projected as 8% of revenue going forward which was an average of the last three years. Implied Price Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 26.00% % % % % Cost of Goods Sold Cost of Goods Sold was projected as a percent of revenue. It is expected that COGS will fall slightly as a percent of revenue as the company brings its canned beer to market. Advertising, Promotion and Selling Advertising, Promotion and Selling was projected as a percent of revenue. The beer industry requires extensive advertising expenses and as a result the expense was projected to stay constant as a percent of revenue. Implied Price Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 6.50% % % % % General and Administrative General and Administrative expense was projected as a percent of revenue. It is projected to fall from 8% of revenue to 7.5% of revenue as revenue growth outpaces salary and benefit costs. Tax Rate The tax rate was projected per management guidance. Management expects tax rates to fall from the current level of 38% down to 35%. UOIG 11

12 Terminal WACC WACC Terminal Year tax rate University of Oregon Investment Group Cash Flows Statement Implied Price Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 34.00% % % % % The Cash flows statement is used to most accurately predict cash for the company in the future. It ensures that the projections made are possible for the firm without taking on additional debt. Share Repurchases Share repurchases were held constant at $50,000 a year, the average of the last three years. While management did not give specific guidance as to the size of the future repurchases, they said they would continue to return as much cash to shareholders as possible. Balance Sheet Current Assets Accounts Receivable Accounts Receivable was projected using the days receivable outstanding ratio. Following management s guidance the ratio stayed level from 2012 onward. Implied Price Terminal Growth Rate er doing an intermediate 150 growth rate 2.0% 2.5% 3.0% 3.5% 4.0% 4.81% % % % % Inventory Management indicated that Undervalued/(Overvalued) inventory control was one of its top priorities going forward. Inventory was projected Terminal using Growth the inventory Rate turnover ratio which is projected to increase going into Prepaid and Deferred Expenses Prepaid expense and deferred income taxes were projected using trends of historical data and the percent of revenue method. Implied Price Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% 5.98% % % % % Non-Current Assets Property, Plant and Equipment Since expanding in 2008, PP&E has been approximately 30% of revenue. This level was projected to stay constant going forward. Depreciation and Amortization Depreciation and Amortization was projected off historical trends to be 12% of beginning PP&E. Purchase of PP&E Undervalued/(Overvalued) Terminal Growth Rate Purchase of PP&E was solved for to equilibrate the beginning PP&E balance, less depreciation, to the ending balance. Other Assets and Goodwill Other assets and goodwill were projected as a percent of revenue using historical trends and management guidance. Current Liabilities Accounts Payable and Accrued Expenses Accounts payable and accrued expenses were projected using the days payable outstanding and days expense outstanding method respectively. UOIG 12

13 Adjusted Beta University of Oregon Investment Group Current Portion of Notes Payable The current portion of notes payable was taken from the debt schedule in the most recent 10-k filing. Figure 23: Beta Calculation SAM Beta SD Weighting 1 Year Daily % 1 Year Weekly % 2 Year Daily % 2 Year Weekly % 3 Year Daily % 3 Year Weekly % 4 Year Daily % 4 Year Weekly % Average Regressed Beta % Hamada Beta % Boston Beer Company Beta 0.71 Non-Current Liabilities Deferred Income Taxes and Other Liabilities Deferred income taxes and other liabilities were projected using the days outstanding method. Notes Payable Notes payable were taken from the debt schedule in the most recent 10-k filing. Stockholders Equity Common Stock Common stock was projected to remain unchanged over the next 5 years as the effect of the share repurchases will be offset by the exercise of employee stock options. Source: UOIG Regressions Additional Paid-In Capital Additional paid-in capital was expected to remain unchanged over the next 5 years. Retained Earnings Retained earnings was calculated as a result of net income and the retained earnings schedule shown in Appendix 5. Implied Price Terminal Growth Rate % 2.5% 3.0% 3.5% 4.0% Discounted Cash Flow Analysis Assumptions Undervalued/(Overvalued) Terminal Growth Rate Beta Beta was estimated as an equally weighted average between a regressed beta and a Hamada beta. Eight regressions were run using different time frames and frequencies to compute the regressed beta. Of the eight regressions, the three with the lowest standard errors were equally weighted. The same individual regressions were run on the comparable industry companies to compute the Hamada beta. Cost of Debt Cost of Debt was taken from the company s most recent note which was issued at 4.25%. Since the company is financed almost entirely by equity, the cost of debt has a negligible effect on the cost of capital. Figure 24: Intermediate Growth Rate Intermediate Growth Rate 6.50% 6.00% 5.50% 5.00% 4.50% 2018E 2019E 2020E 2021E 2022E Source: UOIG Projections Risk-Free Rate The 10-year U.S Treasury Rate was used as the risk free rate. The 30-year U.S Treasury Rate was used as the terminal risk free weight. Terminal Growth Rate A 3.00% terminal growth rate was applied as group standard. Intermediate Growth Rate An intermediate growth rate was applied between 2018 and 2022 to bridge the 10.34% free cash flow growth in 2017 and the terminal growth rate of 3%. Intermediate growth rate started at 6.5% and decreased by 0.5% each year. UOIG 13

14 Leveraged Buyout (LBO) Analysis Assessing Buyout Targets 10.0x 9.0x 8.0x 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Figure 25: Debt to EBITDA Source: UOIG Projections Figure 26: Forward LIBOR Curve Source: Bloomberg A large part of the leveraged buyout assumptions were modeled after Taylor Gentry s Gardner Denver report; however, many adjustments were made to improve the model for Boston Beer Company. When screening for buyout targets multiple requirements were taken into account. First of all, the company had to be small enough to be reasonably bought out by an average private equity firm. Additionally, stability of operating cash flows was taken into account in order to represent the necessity of the purchased company to pay off a large amount of debt and interest in a short amount of time. Many characteristics of good LBO candidates were not known going into this report, but were learned throughout the process. These include: Amount of Debt to EBITDA that target company can handle Large level of operating cash flow capable of paying down debt Motivated seller with minimum emotional investment in company Ability to realize operating efficiencies and increase profit simultaneously Expansion of multiples during projected period Debt Typically private equity firms purchase companies with a blend of 70% debt and 30% of their own equity. This is done in order to achieve an internal rate of return (IRR) of at least 20% which is roughly the industry average IRR. The firm s IRR is measured as its returned equity divided by its invested equity, all minus one. Essentially, a larger amount of debt leads to a higher IRR, because the company had to invest less of its own equity to purchase the company. Research resulted in the understanding that a private equity cannot reasonably purchase the company with more than 7x the target company s EBITDA. A level of debt greater than that will be extremely difficult for companies to pay down over the short 5 year time period and will not be supported by most investment banks. Common types of debt taken out to purchase companies include large senior unsecured notes and term loans, a smaller subordinated note, various bonds, and a revolving line of credit. The debt mix for Boston Beer Company included an extension of the revolver that is already in place to $100 million. A $1 billion U.S. term loan and a $300 million subordinated note issued at 8% were also taken out. Pricing of the debt was a complex process that was further complicated by the low interest rate environment of today s economy. A pool of debt comparables was created in an attempt to mirror the operations of Boston Beer Company and ability to pay off its debt and interest. Requirements for debt comparables were company size, size of debt, maturity date, issuance date, and operational risk of the company. Due to SAM s small size and minor debt history, all prices received a premium to the average prices in order to reflect its lack of credit history. Additionally, the forward LIBOR curve was taken from Bloomberg in order to get an estimate of rates going forward. Again, the current low rate environment is not reasonable for pricing debt. Therefore, after taking the average prices above LIBOR of the debt comparables, a premium was added to give a more accurate estimate of debt pricing for Boston Beer Company. UOIG 14

15 Exit Multiple University of Oregon Investment Group LBO implementation Figure 27: Normal vs. LBO Revenue $1,100,000.0 $1,000,000.0 $900,000.0 $800,000.0 $700,000.0 $600,000.0 $500,000.0 $400,000.0 $300, A 2013E 2014E 2015E 2016E 2017E Normal Revenue LBO Revenue Source: SAM Financials and UOIG Projections The LBO was conducted by projecting the three statements forward with the new debt on the books. Analysis of the company s expenses was then conducted in order to decide where the most operating efficiencies could be realized. This is necessary because the new debt and interest must be paid down in the projected period. Therefore, expenses must be cut in order to support the debt Advertising, promotional, and selling expenses were cut first followed by a reduction in general and administrative expenses. Cost of goods sold was also trended down slightly. Additionally, accounts receivable was reduced to increase cash assuming that Boston Beer would pressure its clients to pay off credits quicker. Accounts Payable was also expanded in order to increase cash assuming that the Company would be able to lean a bit more heavily on its suppliers during this time period. The above efficiencies resulted in a much higher cash balance for the company in order to pay off its debt and interest. It is also important to note that revenues were also trended down in order to reflect that impact of the decrease in the advertising, selling, and promotional expense. IRR Purchase Premium 0 0.0% 6.1% 12.2% 18.3% 24.4% 11.00x 20.77% 15.95% 11.95% 8.56% 5.63% 12.00x 25.34% 20.33% 16.18% 12.67% 9.63% 13.00x 29.45% 24.28% 20.00% 16.37% 13.23% 14.00x 33.21% 27.89% 23.48% 19.75% 16.51% 15.00x 36.67% 31.21% 26.69% 22.86% 19.54% Method: DCF Forward Comps LBO Figure 28: Final Implied Price Final Implied Price Implied Price: Weight: $ % $ % $ % Final Implied Price $ Current Price $ Overvalued (0.76%) Source: UOIG Projections A purchase premium of 12% was applied in order to reflect the amount above enterprise value that would be paid in order to purchase all shares outstanding. This premium represents the percentage undervaluation of the Company on an LBO basis. A selling price was determined at the end of the period by applying an exit multiple of 13x to the terminal year EBITDA. Further details of the LBO and its assumptions can be found in Appendix 12. LBO Decision The LBO analysis was not weighted in the final valuation for a multitude of reason. First of all, the amount of debt exceeded the 7x EBITDA limit. In order to take out the proper 70% debt and 30% equity mix for SAM, a total debt of 11x EBITDA had to be applied. In order to get debt levels down to the right amount, the ratio of debt to equity would have to be cut to 50:50. This is not reasonable, as private equity firms are not willing to contribute such a high level of equity for a deal. This assumption alone invalidates Boston Beer Company as a reasonable buyout target. Additionally, the Founder s involvement in the Company makes it extremely unlikely that he would ever be willing to sell the company. Recommendation Boston Beer Company is the largest craft brewer in the United States with a market share of over 19%. Sales are continuing to increase at a rate of XX% driven by the introduction of new products and the success of national advertising campaigns. However, it is beginning to face competition from both the large international brewers and the smaller microbrewers as they attempt to capture the profitability of the craft brewing sector. Going forward, it is uncertain how Boston Beer will be able to respond to the increasing competition within the industry. While we believe that Boston Beer Company is well managed and well positioned, the increasing competition within the industry leads us to recommend a Hold for all portfolios with a final implied price of $ UOIG 15

16 Appendix 1 Comparables Analysis Comparables Analysis SAM Monster MNST TAP SBUX STZ BREW Green GMCR Mountain ($ in millions) Boston Beer Co. Beverage Corp. Molson Coors Brewing Co. Starbucks Corp. Constellation Brands Inc. Craft Brew Alliance Inc Coffee Roasters Inc. Stock Characteristics Max Min Median Weight Avg % 25.00% 25.00% 5.00% 5.00% 0.00% Current Price $ $7.97 $50.26 $53.38 $ $56.66 $49.40 $61.81 $50.26 $7.97 $58.26 Beta Size Short-Term Debt $1,245,600.0 $0.0 $642.0 $314,757.1 $62.0 $0.0 $1,245,600.0 $0.0 $66,500.0 $642.0 $11,414.0 Long-Term Debt 3,928, , ,190, ,422, , ,928, , ,921.0 Cash and Cash Equivalent 2,459, , , , , , , ,459, , , ,530.0 Non-Controlling Interest 24, , , , Preferred Stock ,855.0 Diluted Basic Shares 749, , , , , , , , , , ,808.6 Market Capitalization 46,314, , ,380, ,887, ,963, ,380, ,167, ,314, ,144, , ,669,586.6 Enterprise Value 44,409, , ,236, ,490, ,890, ,060, ,236, ,409, ,939, , ,995,246.6 Growth Expectations % Revenue Growth 2013E 74.6% 9.7% 13.1% 15.8% 11.1% 13.1% 12.0% 13.5% 74.6% 9.7% 15.9% % Revenue Growth 2014E 20.5% 2.9% 11.8% 10.4% 10.3% 13.0% 11.8% 2.9% 20.5% 10.4% 13.2% % EBITDA Growth 2013E 94.3% 3.2% 16.5% 16.3% 10.2% 13.3% 18.7% 3.2% 94.3% 16.5% 21.6% % EBITDA Growth 2014E 18.0% 6.0% 15.3% 13.6% 12.5% 15.3% 18.0% 6.0% 17.7% 11.3% 8.0% % EPS Growth 2013E 38.1% 2.8% 21.5% 17.5% 9.2% 20.2% 21.5% 2.8% 28.5% 38.1% 17.1% % EPS Growth 2014E 50.5% 6.3% 20.8% 17.5% 14.4% 17.5% 20.8% 6.3% 23.1% 50.5% 14.4% Profitability Margins Gross Margin 57.0% 29.6% 39.8% 48.1% 53.3% 51.4% 39.8% 57.0% 37.4% 29.6% 34.3% EBIT Margin 26.8% 3.2% 23.2% 22.0% 15.0% 26.8% 23.7% 16.2% 23.2% 3.2% 15.7% EBITDA Margin 29.4% 7.3% 26.9% 25.2% 18.3% 27.8% 29.4% 20.3% 26.9% 7.3% 20.7% Net Margin 16.7% 1.7% 11.2% 14.2% 9.3% 16.7% 16.5% 11.1% 11.2% 1.7% 9.3% Credit Metrics Interest Expense 227, , , , , Debt/EV Leverage Ratio Interest Coverage Ratio 2, , Operating Results Revenue $14,899,896.0 $185,680.5 $4,445,568.0 $6,021,844.4 $698,521.3 $2,329,790.0 $4,445,568.0 $14,899,896.0 $4,885,568.0 $185,680.5 $4,474,360.0 Gross Profit 8,489, , ,770, ,138, , ,198, ,770, ,489, ,828, , ,534,356.0 EBIT 2,406, , ,051, ,171, , , ,051, ,406, ,132, , ,771.5 EBITDA 3,024, , ,307, ,408, , , ,307, ,024, ,313, , ,730.0 Net Income 1,654, , , , , , , ,654, , , ,947.0 Capital Expenditures 1,114, , , , , , , ,114, , , ,130.3 Operating Cash Flow 2,465, , , ,059, , , ,004, ,465, , , ,651.0 Free Cash Flow 1,543, , , , , , , ,543, , , ,303.3 Multiples EV/Revenue 3.89x 0.86x 2.85x 3.17x 2.71x 3.89x 2.75x 2.98x 2.85x 0.86x 2.01x EV/Gross Profit 7.62x 2.91x 6.91x 6.59x 5.08x 7.56x 6.91x 5.23x 7.62x 2.91x 5.86x EV/EBIT 26.53x 11.64x 14.51x 15.27x 18.04x 14.51x 11.64x 18.45x 12.31x 26.53x 12.84x EV/EBITDA 14.82x 9.36x 11.72x 12.73x 14.82x 14.01x 9.36x 14.68x 10.62x 11.72x 9.72x EV/(EBITDA-Capex) 36.25x 12.13x 14.95x 17.27x 22.19x 14.95x 12.13x 23.25x 12.75x 36.25x 16.19x Price/Operating Cash Flow 24.33x 8.13x 14.98x 17.90x 22.94x 24.33x 8.13x 18.79x 13.68x 14.98x 15.19x Price/Free Cash Flow 47.22x 11.81x 26.94x 24.07x 47.22x 26.94x 11.81x 30.02x 20.08x 36.67x 42.85x Market Cap/Net Income = P/E 47.65x 11.14x 24.08x 22.72x 30.23x 24.08x 11.14x 27.99x 18.56x 47.65x 20.74x Multiple Implied Price Weight EV/Revenue $ % EV/Gross Profit $ % EV/EBIT $ % EV/EBITDA $ % EV/(EBITDA-Capex) $ % Price/Operating Cash Flow $ % Price/Free Cash Flow $ % Market Cap/Net Income = P/E $ % Price Target $ Current Price Overvalued (9.20%) UOIG 16

17 Appendix 2 Discounted Cash Flows Analysis Revenue Model Revenue Model ($ in thousands) 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Core Brand Barrels Sold 1, , , , , , , , , ,118.8 % Growth N/A 1.46% 11.78% 9.38% 10.36% 10.00% 9.00% 8.50% 8.00% 7.50% Revenue Per Barrel $195.4 $201.9 $204.8 $207.3 $212.4 $215.6 $218.8 $222.1 $224.8 $227.1 % Growth 10.32% 3.37% 1.43% 1.19% 2.47% 1.50% 1.50% 1.50% 1.25% 1.00% Total Core Brand Revenue $389,137.2 $408,120.7 $462,711.0 $512,139.5 $579,133.0 $646,602.0 $715,368.1 $787,817.0 $861,477.9 $935,349.6 % Growth N/A 4.88% 13.38% 10.68% 13.08% 11.65% 10.64% 10.13% 9.35% 8.57% % of Total Revenue 89.18% 90.00% 91.47% 91.73% 92.13% 92.57% 92.89% 93.11% 93.21% 93.13% Total Non-Core Brand Revenue $60,416.8 $45,325.3 $43,159.0 $46,142.5 $49,447.0 $51,919.4 $54,774.9 $58,335.3 $62,710.4 $68,981.5 % Growth N/A (24.98%) (4.78%) 6.91% 7.16% 5.00% 5.50% 6.50% 7.50% 10.00% % of Total Revenue 13.85% 10.00% 8.53% 8.27% 7.87% 7.43% 7.11% 6.89% 6.79% 6.87% Less: product recall returns ($13,222.0) Total Revenue $436,332.0 $453,446.0 $505,870.0 $558,282.0 $628,580.0 $698,521.3 $770,143.0 $846,152.3 $924,188.3 $1,004,331.1 % Growth 14.65% 3.92% 11.56% 10.36% 12.59% 11.13% 10.25% 9.87% 9.22% 8.67% Appendix 3 Discounted Cash Flows Analysis Income Statement Statement of Operations ($ in thousands) 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E Revenue $315,250.0 $380,575.0 $436,332.0 $453,446.0 $505,870.0 $558,282.0 $628,580.0 $698,521.3 $770,143.0 $846,152.3 $924,188.3 $1,004,331.1 Less Excise Taxes 29, , , , , , , , , , , ,346.5 Net Revenue $285,431.0 $341,647.0 $398,400.0 $415,053.0 $463,798.0 $513,000.0 $580,222.0 $642,639.6 $708,531.6 $778,460.1 $850,253.3 $923,984.6 Cost of Goods Sold 121, , , , , , , , , , , ,775.8 Gross Profit $164,276.0 $189,359.0 $183,887.0 $213,818.0 $256,327.0 $284,567.0 $315,210.0 $349,260.7 $386,996.9 $427,306.9 $469,025.6 $512,208.9 Operating Expenses: Advertising, Promotion and Selling 113, , , , , , , , , , , ,169.4 General and Administrative 22, , , , , , , , , , , ,324.8 Impairment of Long-Lived Assets 0.0 3, , , Settlement Proceeds ($20,500.0) Total Operating Expenses $136,326.0 $152,474.0 $169,825.0 $159,547.0 $175,149.0 $180,912.0 $219,626.0 $244,482.5 $268,587.4 $294,037.9 $320,000.2 $346,494.2 Operating Income $27,950.0 $36,885.0 $14,062.0 $54,271.0 $81,178.0 $103,655.0 $95,584.0 $104,778.2 $118,409.5 $133,269.0 $149,025.4 $165,714.6 Other (Expense) Income, Net: Interest (Expense) Income $3,143.0 $4,252.0 $1,604.0 $112.0 $79.0 $54.0 $31.0 $0.0 $0.0 $0.0 $0.0 $0.0 Other (Expense) income, Net (16.0) (149.0) (209.0) (98.0) Total Other (Expense) Income, Net 3, , , (70.0) (155.0) (67.0) Income Before Provision for Income Taxes 31, , , , , , , , , , , ,714.6 Provision for Income Taxes 13, , , , , , , , , , , ,000.1 Net Income $18,192.0 $22,491.0 $8,088.0 $31,118.0 $50,142.0 $66,059.0 $59,467.0 $64,962.5 $74,302.0 $84,625.8 $95,748.8 $107,714.5 UOIG 17

18 Appendix 4 Discounted Cash Flows Analysis Statement of Cash Flows Statement of Cash Flows ($ in thousands) 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E Cash Flow Provided by Operating Activities: Net Income $18,192.0 $22,491.0 $8,088.0 $31,118.0 $50,142.0 $66,059.0 $59,467.0 $64,962.5 $74,302.0 $84,625.8 $95,748.8 $107,714.5 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 4, , , , , , , , , , , ,270.8 Impairment of Long-Lived Assets 0.0 3, , , Loss on Disposal of PP&E (8.0) Stock Based Compensation Expense 2, , , , , , , Excess Tax Benefit from Stock Based Compensation Arrangements (2,240.0) (1,792.0) (4,065.0) (1,640.0) (3,014.0) (5,346.0) (7,894.0) Deffered Income Taxes (731.0) (1,702.0) 7, , ,425.0 (453.0) 2, , , , , ,963.5 Purchase of Trading Securities (36,577.0) (47,520.0) Procedes from Sale of Trading Securities 39, , , Changes in Operating Assets and Liabilities: Accounts Receivable (8,343.0) (236.0) (142.0) (2,146.0) (3,161.0) (8,305.0) (3,506.1) (3,640.1) (3,859.5) (3,960.8) (4,066.1) Inventories (3,385.0) (1,056.0) (4,618.0) (2,850.0) (1,056.0) (7,458.0) (10,289.0) (4,535.5) (3,088.2) (3,015.2) (2,761.9) (4,004.6) Prepaid Expenses and Other Assets (1,506.0) (8,875.0) 6,483.0 (3,950.0) (2,146.0) 6,123.0 (7,342.4) (1,432.4) (1,520.2) (1,560.7) (1,602.9) Accounts Payable 6,564.0 (234.0) 2, ,052.0 (5,832.0) (617.0) 8, , , , , Accrued Expenses and Other Current Liabilities 7, , , , , , , , , , ,014.3 Other Liabilities 1,576.0 (534.0) (167.0) (427.0) 1,021.0 (711.0) (329.0) Net Cash Provided by Operating Activities $28,977.0 $53,794.0 $39,842.0 $65,565.0 $67,830.0 $72,760.0 $95,330.0 $85,620.0 $103,809.2 $117,240.7 $131,564.2 $142,804.7 Cash Flow Used in Investing Activities: Purchases of Property, Plant and Equipment (9,056.0) (25,607.0) (59,539.0) (16,997.0) (13,608.0) (19,599.0) (66,010.0) (42,402.2) (46,633.3) (50,527.9) (53,872.3) (57,313.6) Cash Paid for Acquisition of Brewery Assets 0.0 (11,507.0) (44,960.0) (1,726.0) Increase in Restricted Cash (628.0) Proceeds from Disposal of Property, Pland and Equipment Net Cash used in Investing Activities ($9,014.0) ($37,109.0) ($104,488.0) ($16,989.0) ($13,588.0) ($19,599.0) ($67,323.0) ($42,402.2) ($46,633.3) ($50,527.9) ($53,872.3) ($57,313.6) Cash Flow Used in Financing Activities: Repurchase of Class A Common Stock ($5,288.0) ($6,084.0) ($15,324.0) ($7,080.0) ($67,981.0) ($62,824.0) ($18,046.0) ($50,000.0) ($50,000.0) ($50,000.0) ($50,000.0) ($50,000.0) Proceeds from Exercise of Stock Options 4, , , , , , , Proceeds from Note Payable (62.0) (77.0) (77.0) (77.0) (77.0) Excess Tax Benefit from Stock Based Compensation Arrangements 2, , , , , , , Net Proceeds from Sale of Investment Shares Net Cash used in Financing Activities $1,668.0 ($543.0) ($5,569.0) ($2,169.0) ($60,754.0) ($52,680.0) ($2,994.0) ($50,062.0) ($50,077.0) ($50,077.0) ($50,077.0) ($50,077.0) Change in Cash and Cash Equivalents $21,631.0 $16,142.0 ($70,215.0) $46,407.0 ($6,512.0) $481.0 $25,013.0 ($6,844.2) $7,098.9 $16,635.7 $27,614.9 $35,414.1 Cash and Cash Equivalents at Beginning of Year 41, , , , , , , , , , , ,968.4 Cash Equivalents at End of Year $63,147.0 $79,289.0 $9,074.0 $55,481.0 $48,969.0 $49,450.0 $74,463.0 $67,618.8 $74,717.8 $91,353.5 $118,968.4 $154,382.5 UOIG 18

19 Appendix 5 Discounted Cash Flows Analysis Balance Sheet and Schedule of Retained Earnings Balance Sheet ($ in thousands) 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E Assets Current Assets Cash and Cash Equivalents $63,147.0 $79,289.0 $9,074.0 $55,481.0 $48,969.0 $49,450.0 $74,463.0 $67,618.8 $74,717.8 $91,353.5 $118,968.4 $154,382.5 Short-Term Investments 19, , Accounts Receivable, Net 17, , , , , , , , , , , ,216.6 Inventories 17, , , , , , , , , , , ,766.4 Prepaid Expense & Other 2, , , , , , , , , , , ,086.6 Deferred Income Taxes , , , , , , , , , , ,034.6 Total Current Assets $120,562.0 $137,893.0 $68,854.0 $113,030.0 $112,004.0 $125,723.0 $162,342.0 $171,000.0 $186,773.6 $212,353.3 $248,816.8 $294,486.7 Non-Current Assets Property, Plant and Equipment, Net 30, , , , , , , , , , , ,299.3 Other Assets 1, , , , , , , , , , , ,656.0 Goodwill 1, , , , , , , , , , , ,538.0 Total Assets $154,475.0 $197,955.0 $219,757.0 $262,936.0 $258,530.0 $272,488.0 $359,484.0 $387,750.4 $425,010.5 $473,393.0 $533,267.3 $602,980.0 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $17,942.0 $17,708.0 $20,203.0 $25,255.0 $19,423.0 $18,806.0 $28,303.0 $29,687.2 $32,731.1 $35,961.5 $39,278.0 $40,173.2 Current Portion of Notes Payable Accrued Expenses and Other 22, , , , , , , , , , , ,433.1 Total Current Liabilities $40,870.0 $60,157.0 $67,057.0 $73,786.0 $72,199.0 $67,049.0 $88,894.0 $99,616.3 $109,822.4 $120,653.7 $131,773.8 $140,683.4 Non-Current Liabilities Deferred Income Taxes $1,494.0 $1,215.0 $9,617.0 $13,439.0 $17,087.0 $17,349.0 $20,463.0 $22,701.9 $25,029.6 $27,499.9 $30,036.1 $32,640.8 Note Payable, Less Current Portion Other Liabilities 3, , , , , , , , , , , ,030.3 Total Liabilities $45,886.0 $64,367.0 $79,729.0 $89,781.0 $92,942.0 $87,743.0 $114,393.0 $127,696.9 $140,655.0 $154,411.7 $168,537.3 $180,535.4 Commitments and Contingencies Stockholders' Equity Class A Common Stock $100.0 $101.0 $101.0 $101.0 $93.0 $87.0 $87.0 $87.0 $87.0 $87.0 $87.0 $87.0 Class B Common Stock Additional Paid-In Capital 80, , , , , , , , , , , ,305.0 Accumulated Other Comprehensive Loss, Net of Tax (197.0) (204.0) (431.0) (359.0) (438.0) (838.0) (883.0) (883.0) (883.0) (883.0) (883.0) (883.0) Retained Earnings 28, , , , , , , , , , , ,894.6 Total Stockholders' Equity $108,589.0 $133,588.0 $140,028.0 $173,155.0 $165,588.0 $184,745.0 $245,091.0 $260,053.5 $284,355.4 $318,981.2 $364,730.0 $422,444.6 Total Liabilities and Stockholders' Equity $154,475.0 $197,955.0 $219,757.0 $262,936.0 $258,530.0 $272,488.0 $359,484.0 $387,750.4 $425,010.5 $473,393.0 $533,267.3 $602,980.0 Retained Earnings Statement ($ in thousands) 2006 A 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E 2015 E 2016 E 2017 E Beginning Retained Earnings $15,581.0 $28,487.0 $44,896.0 $37,664.0 $61,704.0 $43,876.0 $47,119.0 $88,541.0 $103,503.5 $127,805.4 $162,431.2 $208,180.0 Net Income 18, , , , , , , , , , , ,714.5 Less: Share Repurchases 5, , , , , , , , , , , ,000.0 Less: Change in Common Stock Ending Retained Earnings $28,487.0 $44,896.0 $37,664.0 $61,704.0 $43,876.0 $47,119.0 $88,541.0 $103,503.5 $127,805.4 $162,431.2 $208,180.0 $265,894.6 UOIG 19

20 Appendix 6 Discounted Cash Flows Analysis Discounted Cash Flow Analysis ($ in millions) 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Total Revenue $315,250.0 $380,575.0 $436,332.0 $453,446.0 $505,870.0 $558,282.0 $628,580.0 $698,521.3 $770,143.0 $846,152.3 $924,188.3 $1,004,331.1 % YoY Growth 20.72% 14.65% 3.92% 11.56% 10.36% 12.59% 11.13% 10.25% 9.87% 9.22% 8.67% Excise Taxes 29, , , , , , , , , , , ,346.5 % Revenue 9.46% 10.23% 8.69% 8.47% 8.32% 8.11% 7.69% 8.00% 8.00% 8.00% 8.00% 8.00% Net Revenue 285, , , , , , , , , , , ,984.6 % YoY Growth 19.70% 16.61% 4.18% 11.74% 10.61% 13.10% 10.76% 10.25% 9.87% 9.22% 8.67% Cost of Goods Sold 116, , , , , , , , , , , ,505.0 % Revenue 36.85% 38.27% 46.30% 40.65% 37.57% 37.55% 38.95% 42.00% 41.75% 41.50% 41.25% 41.00% Gross Profit $169,267.0 $196,013.0 $196,390.0 $230,737.0 $273,754.0 $303,359.0 $335,418.0 $372,054.4 $412,143.6 $455,032.1 $499,487.1 $545,479.6 Gross Margin 53.69% 51.50% 45.01% 50.89% 54.12% 54.34% 53.36% 53.26% 53.52% 53.78% 54.05% 54.31% Advertising Promotion and Selling $113,669.0 $124,457.0 $132,901.0 $121,560.0 $135,737.0 $157,261.0 $169,306.0 $188,600.8 $207,938.6 $228,461.1 $249,530.9 $271,169.4 % Revenue 36.06% 32.70% 30.46% 26.81% 26.83% 28.17% 26.93% 27.00% 27.00% 27.00% 27.00% 27.00% Depreciation and Amortization 4, , , , , , , , , , , ,270.8 % Revenue 1.58% 1.75% 2.87% 3.73% 3.44% 3.37% 3.21% 3.26% 3.27% 3.28% 3.30% 3.31% General and Administrative 22, , , , , , , , , , , ,324.8 % Revenue 7.19% 6.46% 8.02% 8.15% 7.73% 7.79% 7.98% 8.00% 7.88% 7.75% 7.63% 7.50% Impairment of Long Lived Assets 0.0 3, , , % Revenue 0.00% 0.90% 0.44% 0.23% 0.06% 0.12% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% Settlement Loss (Procedes) (20,500.0) % Revenue 0.00% 0.00% 0.00% 0.00% 0.00% -3.67% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Earnings Before Interest & Taxes $27,950.0 $36,885.0 $14,062.0 $54,271.0 $81,178.0 $103,655.0 $95,584.0 $104,778.2 $118,409.5 $133,269.0 $149,025.4 $165,714.6 % Revenue 8.87% 9.69% 3.22% 11.97% 16.05% 18.57% 15.21% 15.00% 15.38% 15.75% 16.13% 16.50% Interest (Expense) Income $3,143.0 $4,252.0 $1,604.0 $112.0 $79.0 $54.0 $31.0 $0.0 $0.0 $0.0 $0.0 $0.0 % Revenue 1.00% 1.12% 0.37% 0.02% 0.02% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other (Expense) Income, Net ($16.0) ($149.0) ($209.0) ($98.0) % Revenue 0.21% 0.13% 0.04% 0.00% -0.03% -0.04% -0.02% 0.00% 0.00% 0.00% 0.00% 0.00% Earnings Before Taxes 31, , , , , , , , , , , ,714.6 % Revenue 10.08% 10.94% 3.63% 11.99% 16.03% 18.54% 15.20% 15.00% 15.38% 15.75% 16.13% 16.50% Less Taxes (Benefits) 13, , , , , , , , , , , ,000.1 Tax Rate 48.57% 51.93% 55.13% 42.84% 38.15% 36.12% 37.72% 38.00% 37.25% 36.50% 35.75% 35.00% Net Income $18,192.0 $22,491.0 $8,088.0 $31,118.0 $50,142.0 $66,059.0 $59,467.0 $64,962.5 $74,302.0 $84,625.8 $95,748.8 $107,714.5 Net Margin 5.77% 5.91% 1.85% 6.86% 9.91% 11.83% 9.46% 9.30% 9.65% 10.00% 10.36% 10.73% Add Back: Depreciation and Amortization $4,991.0 $6,654.0 $12,503.0 $16,919.0 $17,427.0 $18,792.0 $20,208.0 $22,793.8 $25,146.8 $27,725.1 $30,461.5 $33,270.8 Add Back: Interest Expense*(1-Tax Rate) Operating Cash Flow $23,183.0 $29,145.0 $20,591.0 $48,037.0 $67,569.0 $84,851.0 $79,675.0 $87,756.2 $99,448.7 $112,351.0 $126,210.3 $140,985.3 % Revenue 7.35% 7.66% 4.72% 10.59% 13.36% 15.20% 12.68% 12.56% 12.91% 13.28% 13.66% 14.04% Current Assets $38,192.0 $42,404.0 $59,780.0 $57,549.0 $63,035.0 $76,273.0 $87,879.0 $103,381.2 $112,055.8 $120,999.8 $129,848.5 $140,104.2 % Revenue 12.11% 11.14% 13.70% 12.69% 12.46% 13.66% 13.98% 14.80% 14.55% 14.30% 14.05% 13.95% Current Liabilities 40, , , , , , , , , , , ,683.4 % Revenue 12.96% 15.81% 15.37% 16.27% 14.27% 12.01% 14.14% 14.26% 14.26% 14.26% 14.26% 14.01% Net Working Capital ($2,678.0) ($17,753.0) ($7,277.0) ($16,237.0) ($9,164.0) $9,224.0 ($1,015.0) $3,764.9 $2,233.4 $346.1 ($1,925.4) ($579.2) % Revenue -0.85% -4.66% -1.67% -3.58% -1.81% 1.65% -0.16% 0.54% 0.29% 0.04% -0.21% -0.06% Change in Working Capital (15,075.0) 10,476.0 (8,960.0) 7, ,388.0 (10,239.0) 3,764.9 (1,531.4) (1,887.4) (2,271.5) 1,346.2 Capital Expenditures 9, , , ,997.0`` 13, , , , , , , ,313.6 % Revenue 2.87% 6.73% 13.65% 3.75% 2.69% 3.51% 10.50% 6.07% 6.06% 5.97% 5.83% 5.71% Acquisitions , , , % Revenue 0.00% 3.02% 10.30% 0.00% 0.00% 0.00% 0.27% 0.00% 0.00% 0.00% 0.00% 0.00% Unlevered Free Cash Flow $2,347.0 ($96,162.0) $39,904.0 $46,958.0 $47,019.0 $22,245.0 $41,589.2 $54,346.9 $63,710.4 $74,609.4 $82,325.5 Discounted Free Cash Flow $39,307.7 $48,547.7 $53,790.0 $59,536.3 $62,089.7 EBITDA $32,941.0 $43,539.0 $26,565.0 $71,190.0 $98,605.0 $122,447.0 $115,792.0 $127,572.0 $143,556.3 $160,994.1 $179,486.9 $198,985.4 EBITDA Margin 10.45% 11.44% 6.09% 15.70% 19.49% 21.93% 18.42% 18.26% 18.64% 19.03% 19.42% 19.81% EBITDA Growth 32.17% % % 38.51% 24.18% -5.44% 10.17% 12.53% 12.15% 11.49% 10.86% UOIG 20