BREW PP

Attar B. – Darren C. – Shamal K. – Vlad P.

Overview Competitive Positioning

Financial Summary

Valuation Risks Conclusion

Craft Brew Alliance, Inc. (BREW)

Sector IndustryConsumer Staples Beverages: Beer

Craft Brew Alliance

52 Week Price Range

Share Price as of March 11

Beta

Avg. Daily Volume

Market Cap

Enterprise Value

Gross Profit Margin

Operating Margin

Return on Assets

Return on Equity

P/E Ratio

EPS

$10.07 - $17.89

$12.51

1.21

50,588

$248.3 Mil

$268.4 Mil

29.35%

2.85%

1.72%

2.67%

83.38

$0.16

(NASDAQ)

Sector IndustryConsumer Staples Beverages: Beer


Financial Summary


Recommendation: Buy

Source: Yahoo Finance


Financial Summary


Ownership Structure

• Public Minority – 43%

• Anhueser-Busch (BUD) – 32%

• Widmer Brothers – 12%

• Kona Founders – 10%

• Management & Board Members –3%

Source: BREW


Financial Summary


SWOT Analysis

Strengths:

- Large domestic market- Streamlined distribution network

- Strong brand portfolio

- Resources of BUD

Weaknesses:

- Too many taxes- Low Margins- Too much competition

- Cash flow

- Highly regulated industry

Opportunities

- Growing economy- New acquisitions- New products- Growing demand- Global reach of business

Threats

- Tax changes- Low cash flow

- Product differentiation

- More government regulation


Financial Summary


Streamlined Distribution

Source: BREW


Financial Summary


$200

$235

$277

$325

$383

$450

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2014 2015 2016 2017 2018 2019

Tho

usa

nd

s

• Expected Sales growth of 17.6% based on 5 year historical growth

• Expanding to capture new market share

• Consumer Aggregate Growth Rate of 14%

Revenue Growth


Financial Summary


• Reduction of COGS of 23%

• Gross margin of 35% in 2017

• Continued reduction in SG&A as BREW becomes more efficient

• Growth of the bottom line1.49% 1.09%

1.54%

2.56%3.84% 5.12% 5.97% 5.97%

3.03% 2.12%

2.85%

4.53% 6.65% 8.77% 10.18% 10.18%

29.55% 28.05% 29.35%30.76%

32.88%35.00%

36.42% 36.42%

66% 69% 66% 62%57%

51% 47% 47%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Dec. 31,2012

Dec. 31,2013

Dec. 31,2014

Dec. 31,2015

Dec. 31,2016

Dec. 31,2017

Dec. 31,2018

Dec. 31,2019

MARGIN GROWTH

Net Margin Operating Margin Gross Margin Cost of Goods Sold

Margins


Financial Summary


$157.83

$185.00

$217.56

$255.85

$300.88

$353.84

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

2014 2015 2016 2017 2018 2019

Hu

nd

red

s

Net Investments

• High growth companies often reinvest cash into the business

• Maintained current Debt/EBITDA ratio

Net Investments


Financial Summary


$0.13 $0.10 $0.16

$0.32

$0.56

$0.87

$1.20

$1.41

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

Dec. 31, 2012

Dec. 31, 2013

Dec. 31, 2014

Dec. 31, 2015

Dec. 31, 2016

Dec. 31, 2017

Dec. 31, 2018

Dec. 31, 2019

Diluted Net Income (dollars per share)

$(4)

$3

$7

$12

$15

$11

$(5)

$-

$5

$10

$15

$20

2014 2015 2016 2017 2018 2019

Tho

usa

nd

s

Cash Flows


Financial Summary


Debt Forecast

• 2014 Debt/EBITDA: 1.04

• Debt/EBITDA should hold steady in the near term

• BREW can grow their debt over the forecast period as a result

$14.36

$19.99

$28.46

$39.39

$50.67

$58.45

$-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

2014 2015 2016 2017 2018 2019

Tho

usa

nd

s

Debt

Debt

1.04 1.06 1.04 1.03 1.02 1.02

0.07 0.09 0.11 0.13 0.14 0.14

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014 2015 2016 2017 2018 2019

DEBT RATIOS

Debt/EBITDA Debt/Assets


Financial Summary


CBA’s Free Cash Flows

• Changes to debt add to rising free cash flows

• Improving gross-margin and lowering operating costs will also increase free cash flows.

• 17.6% revenue growth rate

• As a percentage of revenue, net investments and depreciation held steady.

2014 2015 2016 2017 2018 2019

Forecasted Rev. Growth 17.60% 17.60% 17.60% 17.60% 17.60%

Expected Growth Rate(Cap Ex./Dep.)

7.86% 7.86% 7.86% 7.86% 7.86%

Op. Cost Margin 97% 95% 93% 91% 90% 90%

Debt Changes $3000 $6270 $8473 $10,925 $11,281 $7778

Free Cash Flow ($4485) $2984 $6896 $11,868 $14,579 $11,254

(In Thousands)


Financial Summary


The DCF Model

Beta: 1.21

• 4-year monthly regression

• S&P 500 and BREW returns

CAPM: 12.4%

• 4.4% risk-free rate

• 11% market risk

Cost of Debt

• 0.96 % yield on long-term debt

• Cost of debt 5% after adding risk-free rate

WACC: 12%

• Debt Weight: 5.83%

• Equity Weight: 94.17%

Target Price: $6.78

• Terminal Value: $96,809,000

• Post-supernormal growth rate: 5%


Financial Summary


The DCF Model – Equity Approach

• CBA investors are primarily equity stakeholders in an organization with a minimal debt ratio of about 6%

• Terminal WACC substituted by new terminal cost of equity• The new cost of equity was based upon a beta of 1

• Computed mean average of both approaches

Mean = $7.01


Financial Summary


DCF Limitations

• The DCF model tends to undervalue high-growth companies

• Cause: The high growth period is realistically longer than five to ten years

• DCF modeling tends to ignore acquisition prospects

• Acquisition likely for small cap companies, especially in an industry undergoing consolidation


Financial Summary


Other Valuation Metrics

Valuation MetricEstimated Target

PriceWeights Total

Price/Earnings $ 8.00 0.10 $ 0.80

Price/Book $23.31 0.10 $ 2.33

Price/Sales $30.37 0.10 $ 3.04

Discounted Cash Flows

$ 7.01 0.25 $ 1.75

Closed Transactions $16.17 0.45 $ 7.28

Weighted Average Target Price $ 15.20


Financial Summary


• What if consumers suddenly stopped buying craft beer

Growth of Craft Beer

• BREW can’t produce enough beer to maintain growth without expansion

Source: BREW


Financial Summary


What if Anheuser Busch stops distributing BREW Products?

Source: BREW


Financial Summary


• Sales are focused in the western region of the United States

• BREW can’t react to changes in discretionary spending

Sales Concentration

Source: BREW


Financial Summary


Conclusion

Source: BREW

Questions?


Financial Summary


AppendixValuation

Company name Price EPS P/E ratio Price/Book Price/Sales Mkt Cap D/E ROA ROE ROI

BREW Craft Brew Alliance $ 13.09 0.16 42.23 2.14 1.33 249.68M 10.57 1.17% 1.79% 1.40%

BUD Anheuser Busch InBEV $ 127.66 5.59 20.7 4.02 4.76 207.67B 97.54 12.50% 31.46% 15.81%

SAM Boston Beer Co Inc. $ 259.51 7.11 28.34 7.84 3.86 3.46B 0.13 17.30% 24.58% 21.74%

TAP Molson Coors Brew Co. $ 74.47 2.76 17.72 1.75 3.34 13.87B 40.52 3.50% 6.24% 4.13%

HINKY Heineken N.V. (ADR) $ 33.01 1.65 20.05 3.3 2.14 37.97B 94.81 5.01% 12.73% 6.88%

Average Multiple Estimated Target Price Weights Total

Average Price/Earnings 25.81 0.61 $ 8.00 0.1 $ 0.80

Average Price/Book 3.81 1.78 $ 23.31 0.1 $ 2.33

Average Price/Sales 3.09 2.32 $ 30.37 0.1 $ 3.04

Discounted Cash Flows $ 7.01 0.25 $ 1.75

Closed Transactions $ 16.17 0.45 $ 7.28

WA Target Price $ 15.20

AppendixDCF Analysis (in thousands)

Expected g (Supernormal Growth) 17.6%LT Revenue Growth

r (Common Cost of Equity) 12.37%CAPM

Debt Ratio 5.83%Debt to Equity Ratio

Est. Tax Rate 39.65%Tax Rate for 2014

r(cost of debt) 5.00%Long term historical Cost of Debt plus premium

WACC 11.94%

Forecast Period 2014 2015 2016 2017 2018 2019

Free Cash Flow$ (4,485)

$ 2,984

$ 6,896

$ 11,868

$ 14,579

$ 11,254

Post-Supernormal Growth Rate 5.00%TTM GDP

Terminal Value$ 96,809

Perpetual Growth

Value of CBA Operations$ 129,123.81

NPVCF+Terminal

Intrinsic Value of CBA Equity$ 129,124

Common Shares Outstanding 19,038 2014 10K

Target Price$ 6.78

4.4%

11.0%Fama and French "The Equity Premium" 1872-2000

1.21Regression of Return SPX vs. BREW

12.4%


Financial Summary


AppendixCONSOLIDATED BALANCE SHEETS (USD $)

Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019In Thousands, unless otherwise specified

Current assets:

Cash and cash equivalents $ 2,726.00

$ 981.00

$ 3,965.24

$ 10,860.78 $ 22,728.92 $ 37,307.73

$ 48,561.53

Accounts receivable, net$ 11,370.00

$ 11,741.00 $ 12,906.99

$ 14,768.20 $ 17,503.09 $ 20,743.88

$ 23,502.53

Inventories$ 16,639.00

$ 18,971.00 $ 20,855.00

$ 23,862.33 $ 28,281.33 $ 33,517.78

$ 37,975.18

Deferred income tax asset, net $ 1,345.00

$ 1,670.00

$ 1,835.85

$ 2,100.58

$ 2,489.58

$ 2,950.54

$ 3,342.92

Other current assets $ 3,403.00

$ 4,413.00

$ 4,851.25

$ 5,550.81

$ 6,578.75

$ 7,796.84

$ 8,833.72

Total current assets$ 35,483.00

$ 37,776.00 $ 44,414.34

$ 57,142.70 $ 77,581.67

$ 102,316.77

$ 122,215.88

Property, equipment and leasehold improvements, net

$ 104,193.00

$ 110,350.00

$ 118,695.61

$ 127,672.38

$ 137,328.05

$ 147,713.97

$ 158,885.36

Goodwill$ 12,917.00

$ 12,917.00 $ 12,917.00

$ 12,917.00 $ 12,917.00 $ 12,917.00

$ 12,917.00

Intangible and other assets, net$ 17,693.00

$ 17,558.00 $ 17,424.03

$ 17,291.08 $ 17,159.15 $ 17,028.22

$ 16,898.29

Total assets $ 205,769.00 $ 216,377.00

$ 237,865.32 $ 272,165.87

$ 322,567.55

$ 382,292.74 $ 433,132.42

Current liabilities:

Accounts payable$ 14,742.00

$ 12,987.00 $ 14,276.73

$ 16,335.46 $ 19,360.58 $ 22,945.30

$ 25,996.71

Accrued salaries, wages and payroll taxes $ 4,616.00

$ 5,114.00

$ 5,621.87

$ 6,432.55

$ 7,623.78

$ 9,035.36

$ 10,236.94

Refundable deposits $ 8,252.00

$ 8,152.00

$ 8,961.57

$ 10,253.84 $ 12,152.73 $ 14,402.87

$ 16,318.26

Other accrued expenses $ 1,381.00

$ 2,316.00

$ 2,546.00

$ 2,913.14

$ 3,452.61

$ 4,091.89

$ 4,636.05

Current portion of long-term debt and capital lease obligations

$ 710.00

$ 1,157.00

$ 1,157.00

$ 1,157.00

$ 1,157.00

$ 1,157.00

$ 1,157.00

Total current liabilities$ 29,701.00

$ 29,726.00 $ 32,563.18

$ 37,092.00 $ 43,746.70 $ 51,632.43

$ 58,344.96

Long-term debt and capital lease obligations, net of current portion $ 11,050.00

$ 13,720.00 $ 19,990.04

$ 28,463.11 $ 39,387.89 $ 50,669.11

$ 58,447.21

Fair value of derivative financial instruments

$ -$ 503.00

$ 1,893.62

$ 2,166.68

$ 2,567.92

$ 3,043.39

$ 3,448.11

Deferred income tax liability, net$ 17,719.00

$ 18,570.00 $ 20,414.18

$ 23,357.94 $ 27,683.53 $ 32,809.29

$ 37,172.48

Other liabilities $ 584.00

$ 665.00

$ 731.04

$ 836.46

$ 991.36

$ 1,174.92

$ 1,331.16

Total liabilities$ 59,054.00

$ 63,184.00 $ 75,592.06

$ 91,916.18

$ 114,377.40

$ 139,329.13 $ 158,743.92

Commitments and contingencies (Note 16)

Common shareholders' equity:

Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 19,115,396 and 18,972,247

$ 95.00

$ 96.00

$ 97.01

$ 98.03

$ 99.06

$ 100.11

$ 101.16

Additional paid-in capital $ 136,972.00

$ 138,391.00

$ 139,824.70

$ 141,273.25

$ 142,736.81

$ 144,215.54

$ 145,709.58

Accumulated other comprehensive loss$ -

$ (312.00)

$ (312.00)

$ (312.00)

$ (312.00)

$ (312.00)

$ (312.00)

Accumulated deficit $ (25,835.00)

$ (22,758.00)

$ (22,758.00)

$ (22,758.00)

$ (22,758.00)

$ (22,758.00)

$ (22,758.00)

Total common shareholders' equity $ 111,232.00 $ 115,417.00

$ 116,851.71 $ 118,301.29

$ 119,765.88

$ 121,245.64 $ 122,740.74

Total liabilities and common shareholders' equity

$ 205,769.00 $ 216,377.00

$ 237,865.32 $ 272,165.87

$ 322,567.55

$ 382,292.74 $ 433,132.42

EBITDA$ 3,800.00

$ 14,358.00 $ 19,990.04

$ 28,463.11 $ 39,387.89 $ 50,669.11

$ 58,447.21

Debt/EBITDA 3.09 1.04 1.06 1.04 1.03 1.02 1.027% 9% 11% 13% 14% 14%


Financial Summary


Appendix

BREW PP

Documents

brew sales

brew conclusionsource

brew questions

brew products

sales growth

efficient growth

revenue growth rate

high growth period