The Boston Beer Company, Inc. is one of the largest craft brewers in the United States founded by Jim Koch in 1984 and is based in Boston, Massachusetts. The Boston Beer Company Inc. is traded in the New York Stock Exchange (NYSE: SAM) with a stock price of $181.02 as of the current date. The stocks 52-week range for the year 2014 was $208.51 to $284 per share (Yahoo Finance, 2016). As of February 12, 2016, there were 12,832,661 shares outstanding. Our assessment is based on extensive financial analysis and is presented in this document supporting a recommendation that The Boston Brewing Company be assigned a medium financial risk rating. The company currently has 1,325 full time employees (The Boston Brewery Company, 2016, pg.1). The company produces and sells alcohol beverages globally; and consists of two operating segments. The first is the Boston Beer Company and the second is the A&S Brewing Collaborative.
Competition within the beer industry is extremely fierce. Due to the highly categorized structure of the industry, there are threats coming from all angles. Boston Beer Company separates itself from its competitors including the Craft Brew Alliance Inc., Anheuser-Busch, Heineken, MillerCoors, and Grupo Modelo. One unique aspect of The Boston Brewing Company’s brand is that their competitors do not offer the variety, specialty, and seasonality of flavors in competing products. SAM’s varieties fall within six major categories: Original, Seasonal, Brewmaster’s Collection, Imperial Series, Barrel Room Collection, and Specialty Beers. Additionally, the company possesses an award winning heritage recipe, is the most decorated brewery in America, and developed a high level of brand loyalty. The company faces strong competition from craft beer manufacturers and mass brewery beverage distributors. The Company leads its competitors in asset turnover as indicated by their quick ratio of 1.42 as compared to their industry average of 1.05 (Macroaxis, 2016). An additional opportunity for the company is that craft brews/premium brews are forecasted to have the greatest growth in the upcoming years (The Boston Beer Company, 2016). SAM is the leading craft beer, but in most instances beer drinkers will be more than willing to drink a light domestic beer or a local micro brew instead. Due to a large fluctuation in supply prices, Boston Beer Company cannot achieve economies of scale. The alcoholic beverage industry may be lucrative, but it is highly regulated and taxed. Federal, state, and local laws govern and regulate many facets of beer manufacturing operations such as production, distribution, marketing, licensing, and distribution relationships. There is risk involved with this area of business because failure to comply may result in higher taxes, penalties, and fees, which may hurt a company’s financials. An additional opportunity for the company is that craft brews/premium brews are forecasted to have the greatest growth in the upcoming years (The Boston Beer Company, 2016).
Recently, the Boston Beer Company appointed Quincy B. Troupe as Senior Vice President of Supply Chain and Frank Smalla, formerly Kraft’s senior vice president of finance as the company’s next chief financial officer. In addition, long-time Director Pearson Cummin, III will retire from the Board of Directors. Mr. Cummin, 73, has been a Director of the Company since its initial public offering in 1995.
The Boston Beer Company has achieved impressive performance in sales growth, reaching $903 million in net revenue for 2014 and a growth of 55.63% since 2012. In fact, the total revenue has grown by 94.7% since 2010 (The Boston Brewing Company, Inc. 2014). The Boston Beer Company’s two-year growth is far superior to their competitors, for example Craft Brew Alliance, Inc., had a surge of 11.63% (Craft Brew Alliance, Inc., 2015). One area worth noting for the Company is the cost of goods sold (COGS). COGS have increased by 111% since 2010, outpacing revenue growth by 16%. In the last two years, Boston Beer Company’s COGS increased by $172.9 million, to $438 million (The Boston Brewing Company, Inc. 2014). Boston Beer Company’s gross profit has reacted as one might expect and grown in sync with revenue growth, increasing to $465 million and improving by almost 48% from 2012 (The Boston Brewing Company, Inc. 2014). SAM’s progress in gross profit has outpaced the Craft Brew Alliance’s by 17% (Craft Brew Alliance, Inc., 2015).
Boston Beer Company’s total operating expense has grown by an average of 16.36% over the last five years, nearly matching their average growth in operating income of 16.11%. The operations during this time have led to a net income of $90.7 million, which is a positive change of 80.97% (The Boston Brewing Company, Inc. 2014). While the Company’s performance in the last two years included a net income increase of $31 million, they fell just short of industry rivals like Craft Brew Alliance, Inc. Craft’s growth of 57% outperformed Boston Beer Company’s growth of 52.6% (Craft Brew Alliance, Inc., 2015). Profitability ratios reveal a few undesirable trends for the Boston Beer Company. Their net profit margin in the last two years has dropped from 10.25% to 10.05% (The Boston Brewing Company, Inc. 2014). The Boston Beer Company is clearly not as effective at transforming their revenue into profits as the competition, as they are just below the sector’s average of 12.81% (Reuters.com, 2016). The Company’s return on total assets (ROA) has suffered over the last two years, falling from 15.85% to 14.99%. However, SAM’s ROA of more than six times the industry’s average shows that the Company’s investments in capital are still paying off. The return on equity (ROE) has also decreased in the last two years sinking to 20.81% from 24.26% but is still well above the industry average of 4.55% (The Boston Brewing Company, Inc. 2014; Reuters.com, 2016). By exploring the Boston Beer Company’s financial performance before interest and taxes, it is easy to see that their 16.23% operating profit margin falls short of the sector average, which is 17.68% and considerably below the industry average of 34.45% (Reuters.com, 2016). One reason for the cumulative shortfalls in profitability ratios might be the excessively large selection of over 80 different beers, malts, and ciders are taxing SAM’s limited resources (The Boston Brewing Company, Inc. 2014). The large variety of drinks can significantly affect the cost of ingredients and bottling, while creating inefficiencies during the production process ultimately increasing the COGS. To put this information in perspective, the Boston Beer Company’s full variety is larger than Anheuser-Busch, a company that has a market cap 90 times greater and was established over a hundred years before the Boston Beer Company (Anheuser-Busch, 2016; Yahoo Finance, 2016). Although the $58.8 million that the Boston Beer Company spends on hops, barley, wheat, apples and other ingredients adds to total COGS, it also helps them to be competitive in the better beer market (The Boston Brewing Company, Inc. 2014). The COGS is notable, but not too concerning when compared to the recent growth of revenue, gross profit, and operating income. The Company’s respectable net profit margin, operating profit margin, ROA, ROE, and gross profit margin should help them remain profitable into the foreseeable future.
Cash Flow and Liquidity Analysis
In this section we will conduct an analysis of the Boston Brewing Company’s financials with the goal of achieving an accurate assessment of the company’s cash flow and liquidity at the end of 2014. Combining this information with data presented in the probability analysis supports the risk rating we’ve assigned to the Company. Reviewing the Boston Brewing Company’s reported finances for the past five years gave us the initial indication that the company has experienced a significant amount of financial growth since 2009. Determining how efficient the Company has been at managing its financials during its growth in size and wealth will be key to assessing how lucrative the business might be in the future.
Examining the Brewing Company’s consolidated statements of cash flows, from 2012 to 2013 net income grew 18.37% to $90.7 million as displayed in the cash flows provided by operating activities section of the document (The Boston Brewing Company, Inc. 2014, p.40). The operating activities section of the cash flows statement also list non-cash items that were adjusted to reconcile net income to net cash flows. According to Merritt (2015), “reconciling net income and operational cash flow involves adding or subtracting such items based on whether they affected profit or cash flows”. Making adjustments to non-cash operational activities from financial sources in this area can improve the overall liquidity for a business giving a more accurate depiction of cash flow as it is reported on the cash flows document.
During the 2014 financial period The Boston Brewing Company reported its largest amount of net cash provided by operating activities, $141.2 million (The Boston Brewing, 2014, p. 40). The company gained a substantial amount of liquidity in this area from a large reduction in its reported accounts payable shown for year 2014 at $884,000, as compared to $8 million shown in the same area for the year 2012. We believe that this can be seen as a noteworthy strength towards the company’s credit worthiness in this area due to the large reduction in the reported balance of the firm’s accounts payable account.
In the cash flows used in investing activities section of the cash flow document the Company reports a substantial increase in investment activity during 2014 of $152 million. According to The Boston Brewing Company (2014), “These investments were made to expand the quality, capacity, efficiency and capabilities of its breweries, both to meet the 2014 growth and the anticipated future growth” (p.9). The Company has continued the trend of investing in equipment to expand its operations and this is made obvious by the continued increase reported on the cash flow statement’s line item Purchases of property, plant and equipment. This investment strategy is potentially what accounts for The Boston Brewery Company’s large growth in its operations and revenue over the course of the past 10 years.
The calculated free cash flows for 2013 is $11.9 million, however; in 2014 the company reported a cash flow of -$34.6 million. From a creditors perspective this raises a noteworthy concern in reference to the company’s liquidity in 2014. The company’s current ratio of 1.88 is significantly higher than other than the industry average of 0.9 (Reuters, 2016). 2014 Current ratio, cash ratio includes free cash flow.
Capital Structure and Financial Leverage Analysis
In order to determine if The Boston Brewing Company has a favorable capital structure and financial leverage footing it is necessary to delve into the company’s current debt structure to include forms of liability. The Company currently holds debt in the forms of capital lease obligations. This is a great sign from the creditor’s position because this means that in the event that the organization is ever in a financial crisis it would not face bankruptcy. The Company’s 2014 capital lease obligations were a negligible $55,000 (The Boston Brewer, 2014). Due to this fact the debt ratio and the interest coverage ratio are non applicable.
According to the balance sheet, obtained from the Sam Adam’s official 10k Report, total liability increased from $114.4 million to $169 million in 2014. It is helpful to note, however; that while liability increased, so did assets during this time. As calculated, the 2014 liabilities to assets ratio were 27.9% in comparison to 2012 when it was 31.8%. According to Johnston (2016), “a ratio of 2 or better indicates that the company is handling its liabilities well and has assets that can produce enough income to cover debts and produce profits”. These ratios represent that Sam Adams is positioned to pay its liabilities with their available cash of 76.4 million (The Boston Brewing, 2014 p. 37).
Sam Adam’s currently has a revolving line of credit in place of $150 million with available rates based on current prime rate or London Interbank Offered rates. Due to a significantly high earnings before interest, taxes, depreciation and amortization (EBITA) to interest expense ratio of 9,492 and the total funded debt to EBITA ratio of 0.00 meeting the minimum requirements of 2.00 and 2.50 respectively the Company is eligible to take advantage of the current low rates (The Boston Brewing Company, 2014. p.49). The financial leverage ratios are as follows: 1.38 for 2014, 1.47 for 2013, and 1.46 for 2012. Reviewing the financial leverage ratios displayed in Table 1 reveals that The Boston Brewing Company is in a position to assume debt in the future. This is due to the fact that Sam Adam’s has had a history of positive liabilities to asset ratios, as well as currently not having any debt on the books outside of capital lease obligations.
To summarize, the purpose for writing this paper is to evaluate the profitability of the Boston Brewing Company, Inc., and to determine the financial risk rating that would be recommended. Since alcohol is regulated by federal, state, and local laws, multiple facets of this industry are strictly regulated. These areas include production, distribution, marketing, licensing, and distribution relationships, and failure to comply can result in hefty fines, which can affect the bottom line. While crafts and premium brews are projected to have exponential grown within the next few years, the risk is that beer drinkers may prefer a light beer, or a product that is brewed locally.
Another aspect to review in determining a risk rating is a company’s cash flow. The Boston Brewing Company increased its account payables in 2014 to $884,000. In 2012, the company only had $8 million reported in accounts payables. The increase shows creditors that the company takes paying its bills seriously, which is a good sign for decreasing a risk rating. However, the company reported $11.9 million in free cash flows in 2013, and a negative cash flow of $34.6 million in 2014. These numbers are of major significance to creditors, since a negative cash flow can cripple a company.
After reviewing the company and financial information provided, it is recommended that the company receive a medium risk rating. What this rating means is that the company should take a closer look at its risk. With fierce competition and negative cash flows, the company has aspects it needs to reevaluate. A medium rating is not the best, but it is far from the worst rating, and this should give the company the drive it needs to audit itself, perform SWOT analyses, and work to repair the issues that are hindering progress. Once the company can increase its cash flow and restructure other financial areas, it could then be considered for a low risk rating.
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