Boston Beer Company Fundamental Analysis

Boston Beer Company Economic Moat

Economic Moat: Narrow

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There are many ways to identify Boston Beer Company’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Boston Beer Company. Please check my summary to understand more about the economic moat.

Performance Checklist

Is Boston Beer Company’s revenue growing YoY for the past 5 years consistently? Yes.

Is the net income growing YoY for the past 5 years consistently? Inconsistent.

Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.

Is the free cash flow positive for the past 5 years? No.

Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.

Is the EPS growing for the past 5 years? Inconsistent.

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Boston Beer Company Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Boston Beer Company Valuation

Estimated intrinsic value: $164.10

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Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.

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Average free cash flow used: USD$100M

Projected growth rate: 6% - 7%

Beta: 1.05

Discount rate: 7.3%

Date of calculation: 15 Feb 2023

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Boston Beer Company economic moat primarily derived from its intangible assets and having a cost advantage.

In the alcoholic beverage industry, strong brands are a key factor in creating economic moats. The industry is well-suited to branded offerings, as small changes in the fermentation process can create a variety of distinct tastes. Private-label products have low penetration, and U.S. producers are protected by intermediation laws. The Boston Beer Company is a good example of a company with a strong portfolio of brands that are leaders in numerous premium-priced malt beverage segments.

Besides branding, intangible assets can relate to a company strong distribution networks and supply chains. In the highly regulated alcoholic beverage industry, these factors are even more important due to three-tier distribution laws. Boston Beer Company has built a strong network of over 400 wholesalers and its reputation for providing high-quality and popular products has likely strengthened its relationships with wholesalers over the years. As craft beer has a short shelf life, the importance of product freshness makes Boston Beer Company's distribution network and supply chain even more critical to the company's success.

As a value investor focusing on economic moats, it is important to understand how cost advantages in the brewing industry develop. The way for cost advantages to develop is through scale-based leverage, which is the ability of larger companies to achieve cost savings through economies of scale. In the brewing industry, larger companies can achieve scale-based leverage by producing large volumes of beer using highly mechanised facilities.

While the industry has become more diverse in recent years, with a variety of beer options available, the top three brewers still control the majority of the market. The malt industry is also similar to carbonated soft drinks in that different beers typically fall somewhere in the middle of the spectrum in terms of differentiation. While the taste profiles of different beers can be distinct, they all have similar functional uses. As a result, leading operators such as Boston Beer Company can typically maintain sufficient volumes to achieve significant scale advantages.

Although Boston Beer Company possesses intangible assets and cost advantages as its economic moat, there are signs of constraints. Moreover, the company lacks other sources of moat. Hence, I will rate Boston Beer Company as narrow economic moat.

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Boston Beer Company's performance has some concerning issues. While the company's revenue has increased over the past five years, the inconsistency in net income and operating cash flow raises concerns about the sustainability of the growth. Additionally, the negative free cash flow in 2021 suggests that the company's cash position may be unstable. Although Boston Beer Company's gross and net margins are in line with the industry average, its performance is worse than its historical levels.

Boston Beer Company's capital allocation performance has been mixed. Its ROE and ROIC have consistently met the minimum requirement of 15% in the past, however, in FY2021, both metrics fell below 10%. Currently, the company's ROE is lower than the industry average, suggesting management inefficiency. Although its ROIC is higher than the WACC, it still lags behind its historical performance.

I am impressed by the fact that Boston Beer Company has had no debt for the past five years and its financial health is in good shape. The absence of debt means that the company does not have to worry about covering interest payments, and its operating cash flow is not constrained. Furthermore, the current ratio, which measures a company's liquidity, suggests that the company is doing well.

With a narrow economic moat, weak performance and unstable capital allocation, I will assign a margin of safety of 40%. So, with an estimated intrinsic value of $164.10, I will only invest in Boston Beer Company if it is trading in the range of $99.