(NYSE: BREW)
TEAM MEMBERS:
Purvi Mittal
Leiyi Huang
Harout Sahakian
Rakesh Venkatayogi
AGENDA
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Business Overview
Macro-Economic & Industry Overview
Technical Analysis
Financial Ratios
Valuation
Recommendation
CRAFT BREW ALLIANCE – INTRODUCTION
Business:
 A craft beer brewing company with a unique alliance
between three craft beer brands
 Operates two segments:
 Beer related operations: Brewing and sale of craft
beers and cider from six breweries
 Pubs operations: Operates 5 pubs for brand
building
 Has master distribution partnership with Anheuser–
Busch
Market Cap
Employees
Annual production Capacity (000’s)
Source: Company website and 10K_2013
$281mm
~725
1,075 barrels
DEVELOPMENT STRATEGY
National Portfolio
Merger Integration
National Portfolio Strategy
and Building Business
Development and Initial Market
Model Foundation
Introduction
12%
Strategy Growth
and
Value Creation
Volume Growth
8%
11%
4%
6%
2%
7% - 11%
6%
2%
0%
2008
2009
Redhook /
Widmer Merger
Source: CBA Investor Presentation
2010
2011
Kona
Merger
2012
Sale of
FSB
Omission
Launch
2013
2014
Square Mile
Launch
2015
BRANDS
• Launched in
1981 in
Seattle
• Distributed in
all 50 states
Source: Company website and 10K_2013
• Launched in
1984 in
Portland
• Distributed in
all 50 states
• Launched in
1994 in
Hawaii
• Distributed in
36 states
• Launched in
2012 in
Portland
• First gluten
free beer
• Launched in
2013
• Distributed in
10 states and
expanding
BREWING FACILITIES
Washington Brewery
Annual / Max
Capacity
(000’s)
220 /
280
New Hampshire Brewery
Annual /
Max Capacity
(000’s)
Oregon Brewery
Annual /
Max Capacity
(000’s)
630 /
650
Hawaii Brewery
Annual / Max
Capacity
(000’s)
Source: Company website and 10K_2013
10 /
10
215 /
280
ANHEUSER–BUSCH PARTNERSHIP
Ownership Structure
AnheuserBusch 32%
Minority
43%
Master Distribution Agreement
 Distribution of Kona, Widmer Brothers, Redhook,
Omission and Square Mile in all states, territories
and possessions of the US
Widmer
Brothers 12%
Management
and Board
4%
Kona
Founders 9%
Source: Company website and 10K_2013
 Distributor Agreement has a term that expires on
December 31, 2018, subject to automatic renewal
 CBA pays margin fees, invoicing, staging and
cooperage handling fees, and inventory manager
fees
HISTORICAL FINANCIAL ANALYSIS
Net Sales
Gross Margin
200
32.0
50
24.0
22
12
110
(%)
$mm
100
24
24
150
127
16.0
25.6
155
146
30.3
29.6
28.1
2011
2012
2013
8.0
0
0.0
2010*
2011
2012
Beer related
2013
Pubs
 Compounded growth of ~11% , primarily
2010
Beer related
 During 2012 and 2013, product mix,
because of shift in mix towards packaged,
variable costs, supply chain challenges and
which has a higher selling price per barrel
pubs pressured gross margin
than draft
 Expected 5‐year gross margin expansion of
500 to 700 basis points
Source: 10K_2013 and investor presentation
Note: does not include alternating proprietorship revenue
MACRO & INDUSTRY
OVERVIEW
BEER INDUSTRY CHARACTERISTICS
Success Factors
Establishment of brand names
Global Beer Market Distribution By Volume
Control of distribution networks
3.40%
Marketing of Products
Effective Quality Control
7.40%
11.60%
43.90%
Differentiation Factors
Ingredients
33.70%
Taste
Price
Packaging
Supermarkets/Hypermarkets
On-trade
Specialist Retailers
Convenience Stores
Other
Source: IBISWorld. Craft Beer Production in the US. August 2013; MarketLine Industry Profile:
Global Beer. August 2013.
CONSUMER EXPENDITURE ON BEER – % CHANGE YOY
13.79%
11.62%
10.84%
9.31% 9.61%
7.23%
5.91%
5.23%
3.17% 2.82%
2.65%
2010
-2.57%
2011
-0.54% -0.29%
2012
2013
-3.93%
-7.83%
Asia Pacific
Eastern Europe
Western Europe
Source: Passport. Euromonitor International. Consumer Expenditure on Alcoholic Drinks. February 2014.
North America
THE CRAFT
GROWTH RATE IN CRAFT
BEER REVENUE FORECASTS
Growth In Craft Breweries
• 2011 – 1,970
• 2012 – 2,347
• 2013 – 2,483
Growth in Volume of Craft Beer
• 2012 – 15%
• 2013 – 18%
Source: MarketLine. Craft Beer: A Fast Growing Market. September 2013; www.brewersassociation.org
14%
13%
12%
10%
9.30%
8%
7.20%
6%
4.60%
3.60%
4%
3.10%
2%
0%
2014
2015
2016
2017
2018
2019
SWOT ANALYSIS FOR BREW
Strengths
•Distribution to retailers through A-B agreement
•Ability to test products in pubs before new launches
•Quality control by using local suppliers
Weaknesses
•Majority ownership by Anheuser Busch limits some activities
•Shipping costs associated with Kona brand products
•Concentration in the Pacific Northwest
Opportunities
•New product launches
•Expansion in domestic and international markets
•Consolidation in the industry
Threats
•Changes in consumer preferences
•Increases in regulation or taxes, especially the excise tax
•Public relations and brand image
FINANCIAL ANALYSIS
TECHNICAL ANALYSIS
Source: Yahoo Finance
FINANCIAL RATIOS
COMPARABLE COMPANIES RATIOS*
CRAFT BREW RATIOS
Liquidity Ratios
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
2011
1.1
0.6
0.1
2012
1.2
0.6
0.3
2013
1.2
0.5
0.2
2011
2012
2013
3.6%
6.0%
6.1%
16.1%
3.0%
1.4%
1.5%
9.1%
2.1%
1.0%
1.2%
9.1%
Profitability Ratios
Operating Profit Margin
Net Profit Margin
ROA
Cash Return on Equity
Source: Brew 10K
Operating Profit Margin
Net Profit Margin
ROA
Cash Return on Equity
0.9
0.6
17.2%
14.3%
6.9%
Solvency Ratios
Solvency Ratios
Debt/Assets
Debt/Equity
Interest overage
Current Ratio
Quick Ratio
Profitability Ratios
2011
2012
2013
9.0%
13.7%
5.9
8.0%
12.3%
7.7
6.9%
10.6%
8.2
Debt/Assets
Debt/Equity
Interest overage
24.5%
57.6%
3.6
*Ratios calculated by taking averages of our comparable companies
FINANCIAL RATIOS
COMPARABLE COMPANIES RATIOS
CRAFT BREW RATIOS
Activity Ratios
Fixed Assets Turnover
Total Assets Turnover
2011
1.5
0.9
2012
1.7
1.0
2013
1.7
1.1
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
Source: Brew 10K
2011
0.6
2.9
3.6%
1.0
1.5
10.0%
2012
0.6
0.9
3.0%
1.1
1.5
2.5%
2013
0.6
0.9
2.1%
1.1
1.5
1.9%
Activity Ratios
Fixed Assets Turnover
Total Assets Turnover
ROE
2.4
0.7
17.2%
*Ratios calculated by taking averages of our comparable companies
COMPARABLE COMPANIES
Anheuser-Busch
20%
Boston Beer Co. Inc.
30%
Carlsberg
20%
Molson Coors Co.
15%
Heineken
15%
COMPARABLE VALUATION
P/E – 15%
Forward P/E – 20%
Estimated
Share Price
EV/Revenue – 15%
EV/EBITDA – 15%
Forward EV/EBITDA – 20%
P/B – 15%
$15.21
ASSUMPTIONS
Assumptions
2009A
2010A
2011A
2012A
2013A
2014P
2015P
2016P
2017P
2018P
5.6%
13.3%
13.5%
5.8%
13.0%
10.0%
8.0%
8.0%
10.0%
6.4%
6.5%
7.3%
7.0%
6.9%
7.0%
8.0%
8.0%
8.0%
8.0%
Gross Margin (% Sales)
20.6%
23.9%
28.1%
27.5%
26.1%
27.1%
28.1%
29.1%
30.1%
31.1%
SG&A Margin (% Sales)
18.7%
21.3%
24.7%
24.7%
24.1%
23.5%
23.0%
23.0%
23.0%
23.0%
5.5%
5.5%
5.5%
5.5%
4.0%
3.8%
3.8%
4.0%
3.8%
Sales Growth %
Excise Tax Rate ( % of
Sales)
CapEx
D&A ($)
5.5%
5.0%
4.5%
4.0%
4.2%
5.0%
5.3%
5.6%
6.0%
6.2%
Interest Expenses
9.5%
6.1%
6.4%
5.0%
3.9%
4.0%
4.3%
4.1%
4.1%
4.2%
DISCOUNTED CASH FLOW ANALYSIS
WACC
Cost of debt
Cost of debt
Marginal tax rate
Cost of debt after tax shield
Cost of equity
Risk-Free Rate (rf)
Market Risk Premium (rm-rf)
CAPM Beta
CAPM Cost of Equity
BREW Realized Return
Cost of Equity
FCF Build
6.0%
40.0%
3.6%
EBIT
Less: Taxes
Less: Capex
Less: Change in NWC
Plus: D&A
Unleveled FCF
2.7%
7.0%
1.24
11.4%
21.1%
12.4%
Capital structure
Debt
Market Cap
Total
4.0%
96.0%
100.0%
Weighted average cost of capital
Business risk premium
Discount Rate
12.0%
1.0%
13.0%
2014P
7,868.9
(2,918.0)
(8,698.0)
81.9
10,872.5
2015P
12,243.7
(4,645.0)
(9,089.4)
(1,314.9)
12,677.3
7,207.3
9,871.7
2016P
15,806.5
(6,049.9)
(9,816.5)
(1,157.1)
14,466.5
13,249.4
2017P
19,861.0
(7,649.8)
(11,159.8)
(1,249.7)
16,739.8
2018P
24,916.0
(9,642.4)
(11,662.0)
(1,687.1)
19,027.5
16,541.4
20,952.1
Terminal Value
Assumptions
Discounted rate (WACC)
4.0%
13.01%
13.01%
13.01%
13.01%
13.01%
Terminal Value
13.01%
241772.4
Discounted period (t)
1.00
2.00
3.00
4.00
5.00
5.00
Discount Factor
0.88
0.78
0.69
0.61
0.54
0.54
PV of FCFs (in thousands)
% of Total EV
Perpetuity Method
6,377.4
3.6%
PV of FCFs
($ thousands)
44,792.3
7,729.3
4.4%
9,179.4
5.2%
Terminal Value Enterprise Value
($ thousands)
($ thousands)
131,150.8
175,943.1
10,140.6
11,365.6
5.8%
Net Debt
($ thousands)
3,357.6
6.5%
131,150.8
74.5%
Equity Value
($ thousands)
172,585.5
Shares
18,972.247
Price
$ 9.10
SENSITIVITY
Enterprise Value - WACC vs. Perpetuity Growth Rate
Perpetuity Growth Rate
WACC
9.1
2.5%
3.0%
3.5%
4.0%
10.0%
11.8
12.5
13.3
14.3
11.0%
10.2
10.8
11.4
12.0%
9.0
9.4
13.0%
8.0
14.0%
4.5%
5.0%
5.5%
15.4
16.8
18.5
12.1
12.9
13.8
14.9
9.9
10.4
11.0
11.7
12.4
8.4
8.7
9.1
9.6
10.1
10.6
7.2
7.5
7.8
8.1
8.4
8.8
9.2
15.0%
6.6
6.8
7.0
7.2
7.5
7.8
8.2
16.0%
6.0
6.2
6.3
6.5
6.8
7.0
7.3
RECOMMENDATION
Price
Weight
DCF
$9.10
75%
Comparable
$15.21
25%
Estimated Price
$10.62
Current Price
$14.64
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