BIG ROCK
BREWERY
Fundamental Analysis
The purpose of this fundamental analysis is to provide the reader with an indepth analysis on the current state of the Canadian economy, as well as an
analysis on the brewing industry within Canada and abroad, and lastly a full
analysis of Big Rock Brewery.
TABLE OF CONTENTS
PART I: ECONOMIC ANALYSIS
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Current state of Canadian economy.
Global economic considerations.
Current and expected rates of interest, inflation, unemployment, etc.
Government fiscal and regulatory policies.
PART II: INDUSTRY ANALYSIS
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Anticipated economic environment.
Industry life cycle.
Dynamics of the brewing industry within Canada.
Impact of Government fiscal and regulatory policies on industry as a whole.
Historical industry performance.
Brewing industry structural changes.
PART III: COMPANY ANALYSIS
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
Financial Analysis.
Big Rock in the media.
o How the releases will affect the projected sales and earnings.
PART IV: CONCLUSION
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Recommended action on Big Rock Brewery stock for investors today.
PART V: WORKS CITED
PART VI: APPENDIX
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PART I: ECONOMIC ANALYSIS
CURRENT POSITION OF THE CANADIAN ECONOMY
The Canadian economy is still on the expansion phase in terms of the business cycle, this
conclusion was reached by analyzing the core leading, coincident, and lagging indicators. During
a recession that had started in 2008, North American capital markets suffered substantially.
The leading indicator analyzed was the S&P & TSX Composite indexes. On March 6th,
2009, the S&P & TSX composite indexes hit ten year lows at 7,591 points. Ever since this
historical low, the Canadian economy has recovered quite steadily compared to in 2011 when the
same composite indexes were recorded at 14,253 points. In this two-year span, an overall growth
rate of 87.76 percent was achieved. After this high, the market had experienced a period of
adjustment, which had made index points fall back down to 13,493 points. This current position
is lower than both pre and post recession historical highs which gives the S&P & TSX
Composite Indexes plenty of room for growth.
The coincident indicators used in our analysis were Gross Domestic Product (GDP), as
well as household income. Canada is currently walking out of the shadow of a financial recession
where it witnessed its GDP drop three percent between the years 2008 and 2009. Although, in
2010, Canada witnessed its GDP grow to 3.54 percent, .54 percent higher than 2008. From 2011
onwards, Canada has kept a moderate growth rate of 2.74 percent, and 1.83 percent again in
2012. Projected GDP growth by the Bank of Canada resulted in the following; 1.6 percent in
2013, 2.3 percent in 2014, and 2.6 percent in 2015. According to projections by the Bank of
Canada, the Canadian Economy is expected to continue growth at a moderate rate in the future.
Household income had also experienced the same decrease GDP had in the year from 2008-
2
2009, but has rebounded since then and current household income is higher than the prerecession level. Expected growth for the future is expected to be positive.
The lagging indicator used for our analysis was the CPI based inflation rate. In general, a
moderate inflation rate is a good sign for any economy. In the last ten years Canada has
experienced an average annual inflation rate of 1.5 percent. The goal rate set by the Bank of
Canada each year is 2 percent, which is certainly attainable and is expected to be obtained within
the new future.
GLOBAL ECONOMIC CONSIDERATIONS:
Figure 3 from the appendix shows different types of commerce, imports and exports,
Canada has with the rest of the world. One strong global economic consideration that shows the
strength of the overall Canadian economy is the Inward flow of foreign direct investment. Up 5.8
percent from 2011, international investors continue to seek investment opportunities in the
strong, but growing Canadian economy. With real GDP per capita and real income per capita on
the steady rise worldwide, one should also see a relationship with the growth of inward FDI in
Canada. Performances of other economies worldwide have a large effect on the economy of
Canada because of the high dollar amounts of FDI invested in Canada. If another country,
Europe, United States, or China for example, were to head into a recession, the dollar amount of
FDI in Canada would drop significantly because of the lower GDP per capita of that country.
3
The figure above shows GDP per capita growth by country. With the increasing growth
of other economies worldwide, this has a positive impact on the Canadian economy, which
attracts these new investors because of its overall strength. Seeing countries Canada has strong
trading ties with such as the United States, United Kingdom, China, Hong Kong, etc. with
increasing accumulated GDP growth is a good indicator that more and more foreign investors are
going to invest in Canada.
FISCAL POLICY
The government of Canada currently runs a currently runs of deficit but has plans to balance the
budget by 2015 and produce a surplus in 2016. The government had a deficit of 2.3 billion in
August 2013, even though the deficit increased from 2.0 billion in July 2013, its down from last
year’s value in August 2013 of 3.0 billion.
Compared to August 2012, the month of August in 2013 saw an increase in Personal Income Tax
revenues of 2.6%, Corporate Tax Revenue increased 13.8%, and Non-Resident Income Tax
increased 17.2%. This can be attributed to a recovering economy and GDP growth in Canada.
4
To enhance growth in Canada the budget is focused on training and providing Canadians with
jobs, helping manufactures become a global presence, investing in research and innovation, and
providing support to families and communities.
Some of the steps they’ve taken to reach these goals included the Canada EU Trade Agreement,
the stimulus packages they’ve sent out to fund projects (and therefore work), and hopefully
creating a surplus to give tax credits to Canadians.
Current & Expected Rates
Inflation
Exchange Rates (USDCDN)
Interest Rates
Unemployement
Current
0.70%
Forecasted
0.56%
1.03 Q3
1.04 Q4
1%
6.90%
1%
7%
5
PART II: INDUSTRY ANALYSIS
CANADIAN BREWING INDUSTRY STRUCTURE AND STRUCTURAL CHANGES
The alcohol beverage industry in Canada is made up of three sectors; the brewery
industry, the distillery industry, and the wine industry, listed in order of market share. Domestic
shipments within the brewing industry in Canada led sales over imported beer to Canada and
beer exported out of Canada overseas or across borders. Domestic shipments from the brewing
industry in Canada in 2009 reached $4,431,000,000, Canadian exported beer only had a value of
$240,200,000, and beers imported to Canada had sales of $641,600,000.
(GoC, 2012).
Mainly two
companies control the Canadian brewery industry; these two companies have 85 percent of the
total market share split amongst them. The third largest brewery in Canada has a 6% market
share, which is quite small in comparison with the market share of the other two. The remaining
9 percent of the brewery industry in Canada is controlled by the many micro-breweries. A
Majority of breweries in Canada are located in Ontario (92 breweries), British Columbia (49
breweries), and Quebec (42 breweries), many of which have been established in their specific
geographical location for decades.
The structure of the overall brewery industry in Canada has changed drastically from how
it had been structured 100 years ago. Today, the brewing industry in Canada has changed from
being many typical plant-like breweries to many of these larger plants closing and starting up
micro-breweries or purchasing an existing micro-brewery in order to extend its product line.
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INDUSTRY LIFE CYCLE & HISTORICAL PERFORMANCE OF BREWERY INDUSTRY, CANADA:
The stage the brewery industry in Canada is in the industry life cycle would be
considered the declining stage as it had hit its peak sales in 2005. Although the brewery industry
may be considered to be in the decline stage, it is one of the uncommon industries of which do
not follow the industry life cycle patterns exactly as it is stated. The brewing industry has been
an established industry for years in Canada with its volume of sales actually increasing because
of structural changes within the industry. The brewery industry in Canada has been mainly
domestic sales, with the domestic beer sales accounting for 94.3 percent of the entire Canadian
market. Of the 94.3 percent domestic sales, it is broken down even further into categories such as
bottled, canned, and draught beers. Sales of bottled beer have remained the most common in
Canada at 49.7 percent of all domestic beer sold where draught beer only has a market share of
7.9 percent. Per capita consumption of beer in Canada was it its peak in 1975 at just over 100
liters, currently at 73 liters beer consumption in Canada is at its all time low in per capita
consumption because of the increasing popularity of the wine industry. The years from 20002010 in Canada had one of its largest in beer sales (dollar value), which increased just over 36
percent.
Due to the structural changes of the Canadian brewery industry, and the increasing GDP
per capita in Canada, volume of beer sales has been on the rise, which has more than doubled
since 2000. Although many feared that after the signing of the free trade agreement with the
United States Canada’s brewery industry would suffer performance loss because of the foreign
companies entering into the market – this was not the case – Imported beer still is a large
percentage of total market sales below domestic beer.
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COMPETITIVE DYNAMICS OF INDUSTRY: PORTER’S 5 FORCES ANALYSIS
The intensity of the rivalry in the Canadian brewery industry is considered to be
moderate-high due to its oligopoly nature. The industry has many smaller microbreweries
which are increasing in volume and increasing the overall competition and rivalry of the
microbrewery market in Canada.
New entrants into the brewing industry in Canada are considered to be moderate
because they must first meet certain requirements in order to be considered a brewery. New
entrants into the Canadian industry must first be certified by the Canadian Government
under the Liquor Licensing act and must also meet certain capital requirements in order to
establish a successful brewery or microbrewery.
The supplier power in the brewing industry in Canada is extremely low because of the
extremely similar inputs to making most beers with prices staying
quite stable because of the amount of suppliers in the market.
Substitutes threat in the brewing industry in Canada is extremely low because of the
number of different types and crafts of beer, as well as the fact that the brewing industry has
been established in Canada for many years and many more to come.
Bargaining power of buyers in the brewing industry in Canada is extremely high. The beer
industry controls a majority of the alcoholic beverage industry sales wise which goes to
show it has many buyers – if some of these buyers were to switch their tastes to wine or
liquor, it would have a large effect on breweries, quite possibly driving the price of the
product down to attract customers back.
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Financial Analysis
(in 000,000s unless otherwise stated)
Profitability Analysis
2012
46.06 $
24.91 $
54.08%
2011
45.18 $
23.80 $
52.68%
2010
45.13 $
24.39 $
54.04%
2009
46.23
26.02
56.28%
$
4.13 $
8.97%
2.53 $
5.60%
(8.20) $
-18.17%
7.43
16.07%
Total Assets
Return on Assets
$
46.30 $
8.92%
45.27 $
5.59%
45.79 $
-17.91%
36.37
20.43%
Total Equity
Return on Equity
$
32.07 $
12.88%
32.45 $
7.80%
34.24 $
-23.95%
25.70
28.91%
$
$
2012
10.89 $
6.32 $
1.72
2011
8.09 $
5.58 $
1.45
2010
6.91 $
4.32 $
1.60
2009
8.39
4.72
1.78
Cash+Short-Term Investments $
Total Receviables
$
Quick Ratio
4.28 $
2.36 $
1.05
0.66 $
2.79 $
0.62
0.77 $
1.79 $
0.59
0.73
3.62
0.92
Revenue
Gross Profit
Gross Profit Margin
$
$
Net Income
Net Income Margin
Liquidity Analysis
Current Assets
Current Liabilities
Current Ratio
Cash Ratio
0.68
0.12
0.18
0.15
Revenue
$
Accounts Recievable
$
Receivables Turnover Ratio
Average Collection Period
2012
46.06 $
2.36 $
19.5
19
2011
45.18 $
2.79 $
16.2
23
2010
45.13 $
1.79 $
25.2
14
2009
46.23
3.62
12.8
29
Property, Plants, Equipment
$
Fixed-Asset Turnover Ratio
Average Turnover Period
44.38 $
1.04
351.7
43.02 $
1.05
347.5
41.72 $
1.08
337.4
50.80
0.91
401.1
Inventory
$
Cost of Sales
$
Days Inventory Outstanding
3.89 $
21.15 $
67
4.43 $
21.39 $
76
3.95 $
20.73 $
70
3.73
20.22
67
Efficiency Analysis
9
BIG ROCK IN THE MEDIA
News published on Nov.23th,2013:
Big Rock opened its own restaurants in 1997 as a subsidiary business. It was popular
immediately following its opening for its casual continental cuisine which investors had
witness growth in sales and earnings.
In recent years, things have changed. Many other large industrial buildings now
surround big Rock, and more restaurants are operating within the close vicinity. Big Rock
Grill has been reduced in size but was redecorated in order to attract more customers. The
owners have introduced a new menu to go along with the new look and beer. Moreover,
they now hold events and offer daily specials. One more note about Big Rock Grill: Juan
Cruz, who recently retired from one of Calgary’s most popular Mexican restaurants, is
cooking part-time at Big Rock.
The new operating strategy Big Rock has implemented has done quite well for the
company as a whole. We can expect because of the redecoration and menu improvements,
Big Rock Grill will now be more competitive to its rivals because of the expected increased
traffic flow. Due to the increase in customers, potential investors may see this as a large
positive for the company, increasing their predicted future earnings for Big Rock, thus
deciding to buy stock of Big Rock at the time of announcement in hope of a positive return
on investment in the future. Since the hiring of Juan Cruz, many other potential investors
may see this as another positive for Big Rock which will also attract more customers and
have the same positive effect the redecoration and extended product line offers. However,
news as such is not always seen as positive to potential investors – this news may have some
investors looking away from investing in Big Rock because of the large amount of capital
that was spent in order to change restaurant operation and feel.
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PART IV: RECOMMENDATION AND VALUATION
Our belief is that Big Rock will continue to be a competitive firm and see its value rise. After
a poor year in 2010 Big Rock Brewery has continued to see its profitability increase. When
investors look at the ratios it’s clear that this company can meet its financial responsibilities
while increasing they’ve increased efficiency from previous years.
They have evaluated the industry and located where they can improve, which is by focusing
on their most profitable products instead of selling more volumes of product. To this end
they have established a clear measureable plan to achieve these goals. Management seems
to have a clear understanding of the market and are changing to meet investors needs by
shifting focus to their high end premium products in there most profitable markets.
We recommend Big Rock Brewery as a BUY stock because of its growth potential, strong
leadership and sound business plan for the future.
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PART V: WORKS CITED
INTERNET SOURCES
Big Rock Brewery. (2013). Quarterly results. Retrieved from
http://www.bigrockbeer.com/sites/default/files/reports/2013Q1.pdf
Government of Canada. (2012). The canadian brewery industry. Retrieved from
http://www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-market-information/byproduct-sector/processed-food-and-beverages/the-canadian-breweryindustry/?id=1171560813521
Trading Economics. (2013). Canada unemployment rate. Retrieved from
http://www.tradingeconomics.com/canada/unemployment-rate
BC Brews. (2011). Porters five forces. Retrieved from
http://bcbrews.files.wordpress.com/2011/09/portersfiveforces.pdf
Bloomberg (2013). Canada's unemployment rate. Retrieved from
http://www.bloomberg.com/news/2013-11-08/canada-unemployment-rate-holds-at-6-9-inoctober.html
Global Rates. (2013). Canada's central bank interest rate. Retrieved from http://www.globalrates.com/interest-rates/central-banks/central-bank-canada/boc-interest-rate.aspx
RBC. (2013). Financial market reports. Retrieved from
http://www.rbc.com/economics/economic-reports/financial-market-reports.html
Trading Economics. (2013). Canada inflation rate. Retrieved from
http://www.tradingeconomics.com/canada/inflation-cpi
Gilchrist, J. (2013). Big rock brewery toasts its revamped, sleeker grill. Retrieved from
http://www.calgaryherald.com/life/Gilchrist Rock Brewery toasts revamped sleeker
Grill/9202153/story.html
TEXTBOOK SOURCES
Cleary and Jones. (2009). Investments: Analysis and management. (3rd ed.). Canada: John Wiley
& Sons.
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PART VI: APPENDIX
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