Case: Boston Beer Company
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…show more content… Are your assumptions about growth in unit sales realistic 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