Boston Beer Stock Analysis - Assignment Example

Due Boston Beer Stock Analysis of the industry The Alcoholic Beverages & Tobacco industry is facing a hostile economic environment which is reducing the overall market share and sales over the last five years. The sales are fell in in the recent past years due to the recession that occurred in 2008. The recession worsened the situation after the industry had suffered a constant decline due to reduced purchasing power of customers. In 2011, the industry began recuperating and recorded a 1.4% and up to 1.7% in 2012. Despite the slow growth, the figures indicate a promising trend that can yield better trade. Recession affected various industries. Beer, being a luxury product, saw a record breaking drop in sales as the marginal propensity to consume alcohol reduced. This was due to the reduced purchasing power. High cost and low income reduced the amount that people spent on beer consumption. However, after the recession, the customers had more income to spend on luxuries and beer, thus, demand pushed sales up (WSJ; October 2, 2012). Top beer producers gained value after the recession, but their brands could not hold on their share prices, they fell. The biggest players in the industry, Anheuser-Busch Inc. saw record sales of 39.9% in 2011 and 39.7 in 2012. The firm was closely followed by Molson Coors brewing n miller brewing. The chart (iii) in the appendix shows the top beer brands in the industry Despite the competitive conditions in the United States alcoholic beverages and tobacco industry, craft beer has gained value and their brands have higher demand. The craft brewing sub-industry improved and recorded a 15% growth in 2011 and 17% in 2012. In 20122, the craft beer sector had a market share of 10.2%. The craft beer sub-industry is expected to continue with the growth trend if all economic conditions remain constant or improve. Boston beer leads in shipments among the microbreweries sector as shown in table iv.(See appendix) Business units of Boston Beer Boston beer is the biggest producer of craft beer with over 15.7% market share in the brewing industry. The company competes in both high quality and premium beers and also on low priced beer. The company has a business unit that produces premium beer under the label Sam Adams to compete with established brewing giants. The company also offers low priced products under the ‘better beer’ label. The beer is priced at par with other craft beer makers thus the prices are highly competitive. Analysis of the company, according to S&P Boston Beer boasts being the largest craft beer brewer in the United States. It is also ranked sixth in the brewing industry in terms of sales. The share price of the SAM as of 11th April 2014 is $234.4 per share that represented small- cap growth. The earnings per share (EPS) stood at $6.80; this implies that every share issued by the company had a return of $6.80 as of April 2014(Yahoo! Finance). This is a meaningful value for a firm in such a competitive industry. The risk index, Beta of 0.88, indicates that the market is not volatile and that prices are no highly responsive to the market. The beta value indicates that the industry is rather stable. The company’s capitalization was well at $2.155 billion. This implies that the outstanding shares were many and the company expansion motives could be satisfied by an additional $2.155 billion. The prevailing business conditions are conducive for the company. In 2013, company net earnings rose by 24%, to reach and estimated $680 million. This represents a double digit growth in shipments. Despite the growth, gross margins fell as the price increased. This can be attributed to inflation. The high prices covered high costs of material and packaging as well as offsetting inflation. It is expected that the margins will widen in 2014 and 2015. Boston beer (SAM) ranks high among its peers. The firm has a quality ranking of B+ and an S&P percentile of 96%. The return in revenue is 9.5%. The closest peer is Ambev SAADS with a market capitalization of $122.171 billion, the highest in the industry. However, the stock price is lowest at $7.30. The beta is 0.47 indicating that prices are sensitive to market conditions, this, it is relatively risky to invest in the company. The return on revenue is higher than that of Boston Beer and stands at 32.6% (McGraw Hill financial, 2014) Another close rival, Compania Cervecerias Unidas ADR has a capitalization of 4.1222 billion, stock price of $22.31, risk index of 0.82 and 1.7% in bond yields. Other major players in the industry are Craft Brew Alliance Molson Coors Brewing’A’ and Molson Coors BrewingB. The peer group statistics are shown in the table below. Peer group Stock symbol Stock Markt cap. Recent stock price$ 52 week high low($) beta Yield % P/E Ratio Quality ranking S&P IQ %ile Return on revenue % Boston Beer A SAM 2155 234.40 265.53/143.42 0.88 Nil 45 B+ 96 9.5 Ambev SA ADS ABEV 122171 7.80 8.56/6.23 0.93 2.7 22 NR 33 32.6 Compania Cervecerias Unidas ADR CCU 4122 22.31 34.95/20.46 0.47 1.7 15 NR 53 11.1 Craft Brew Alliance BREW 270 14.25 18.70/7.13 0.82 Nil NM B- 58 1.1 Molson Coors BrewingA TAP.A 319 57.68 60.52/46.94 0.74 2.6 16 B+ 40 6.4 Molson Coors BrewingB TAP 8890 57.08 60.90/46.94 0.83 2.6 19 B+ 64 13.4 Adapted from S&P Capital IQ From the table above, Boston beer makes the highest sales in its category. The sampled revenues, 2011 and 2012 indicated that Boston Beer surpassed all the peers in terms of shipments. Shipments in 2011 in thousand barrels estimated at 2096 and 2150 in 2012. This represented a percentage change of 2.6%. However, increased competition reduced the market share of Boston beer from 17.1% in 2011 to 15.7% in 2012. The data shows that the company is worth an investment consideration. The main threat to the industry is the wines and spirits firms. For years now, wines and spirits have acted as substitutes for beer. Statistics show that improvement in the wines and spirits market eats into the market of beer. The continuous improvement in the company financial position is due to the infusion of investments through the capital market. The investments induce returns and increase the value of the firm (Damodaran and Aswath 6) Calculations i. Beta was calculated as the slope of the graph plotted between the expected returns and market returns. It was also obtained from a regression of SAM returns against the S&P500 returns. (See appendix) β =0.9667 ii. Estimate the expected return for the S&P E (RS&P) = the average monthly return for the past three years 0.017195 * 12 = 20.6% Estimating the annual risk free return in a similar manner Rf = 2.35% If we put the values into the equation for the CAPM in order to estimate the stocks return E(Rs) = rf + β [E(RM) ‐ rf] E(Rs) = 2.35% + 0.97 ( 20.6% ‐ 2.35% ) E(Rs) = 20.05% Thus k =  20.05% CAPM values CAPM = Risk-free rate + Beta (IRR - Risk-free rate). = 2.35%+0.97(20.05-2.35) =19.52% iii. Calculating the value of the firm using the PVGO approach. The dividend for the firm is 0. This would give a negative PVGO. Thus, we assume that the price of the firm is equal to its value, then PVGO = P - E/r =234.40-5.18/0.2 = 208.5 V = E/r + PVGO V= $234.4 iv. Sustainable price/earnings ratio This is the ratio of last sale price and earnings per share P/E=last price/EPS Last price=236.44 EPS=5.18 P/E=236.44/5.18 P/E=45.60 v. Bull call spread Bull call spread Max. Profit = Difference in strikes - Net Debit SAM buying strike price=30 SAM selling strike price= 35 Net debit = 1-5 =-4 Thus, maximum profit= (35-30)-(1-5) =9 The maximum profit is $9 The profit is $900 for 100 shares Conclusions and recommendations The overall sentiment of the SAM stock is a strong buy. This is because the industry prospects insinuate that growth will continue into the last quarters of the financial year 2014. Despite a few shortfalls in the anticipated earnings, the EPS of the company increased by 6.4% to and EPS of $1.33, up from $1.25 in 2012. In the stock market, this change implies a bigger impact on future earnings of the company. The changes that saw the growth are still in place, thus more growth is expected. As mentioned in the analysis, such changes include diversification of product lines. The company recorded a full year growth of 18%. The increased earnings and constant growth indicate that the stocks of the company are likely to achieve better ratings. Consequently, the price of the shares is fairly constant with just a few deviations, the volatility of the stock of the firm is relatively low at a calculated value of 0.97 (β =0.9667). This implies that there is a workable level of confidence in the firms stocks.. The mean value is $234 per share. The consistency of the price shields investors from loses associated with share price falls, a tendency that scares investors. It is recommendable to invest in the company stocks. Despite obstructing reports that the company has not realized the growth estimates. The non-realization of the estimates is due to underlying factors such as inflation, global recession and also competition. However SAM stocks remain stable and valuable as compared to its peers. References McGraw Hill Financial. "Boston Beer Co Inc. (The)." Stock Report (2014): n. pag. Web. 14 Apr. 2014 McGraw Hill Financial. "Alcoholic Beverages & Tobacco." INDUSTRY SURVEYS (2013): n. pag. Web. 14 Apr. 2014. "The Boston Beer Company - Overview." The Boston Beer Company - Overview. N.p., n.d. Web. 15 Apr. 2014 "Press Release." The Boston Beer Company - Overview. N.p., n.d. Web. 15 Apr. 2014. Damodaran, Aswath. Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit. Hoboken, N.J: Wiley, 2011. Print. "SAM Historical Prices | Boston Beer Company, Inc. (The) Stock - Yahoo! Finance." Yahoo Finance - Business Finance, Stock Market, Quotes, News. N.p., 15 Feb. 2014. Web. 15 Apr. 2014. "Boston Beer Company, Inc. (The) (SAM) Stock Chart." NASDAQ.com. N.p., 15 Feb. 2014. Web. 15 Apr. 2014. "Beer Marketers Insights - Beer Statistics News." Beer Marketers Insights N.p., n.d. Web. 15 Apr. 2014. Appendix Table i. Stock market prices for SAM and S&P. (Yahoo! Finance) Table ii. Regression output for beta (Excel Output) Table iii. Top beer brands in the USA Table iv. Sales in microbreweries sector Read More