Multiplies-example

Multiplies-example - FINA 537 Equity Valuation Professor...

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Valuation using Multiple example FINA 537 Equity Valuation Professor Laura Xiaolei Liu
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2 Example of Multiple-Based Valuation Boston Beer Boston Beer (www.bostonbeer.com ) is the owner of well-known brands such as Samuel Adams, Hardcore and Twisted Tea. The company was founded by sixth-generation brewer Jim Koch in 1984. After ten years, the company decided to go public.
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3 Boston Beer’s Peers: Pete’s and Redhook Pete Slosberg began brewing as a hobby back in 1979. In 1986, Pete's Brewing Company was formed, and in 1995 they had their IPO. Paul Shipman and Gordon Bowker founded Redhook Ale Brewery in Seattle, Washington in 1981. The Ballard area of Seattle was chosen for the brewery site because it offered light industrial facilities necessary for brewing. It was also the center of a community that still retained strong European traditions. They had their IPO in 1995.
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4 Example of Multiple-Based Valuation: Boston Beer This valuation is set in an IPO context A valuation setting where no prior market value exists The company is going public in the Fall of 1995, following recent IPO’s by two competitors, Redhook and Pete’s Let’s start by analyzing Boston Beer’s business model relative to traditional beer companies and its competitors (Redhook and Pete’s)
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5 Beer Industry Traditional brewers Compete via economies of scale in operations and advertising Craft brewers High quality premium beer, brand building through customer awareness Two models among craft brewers (at the time of Boston Beer’s IPO in 1995) Regional brewers Contract brewers
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6 Beer Industry Regional brewers Own and operate their production facilities Spend little on sales and marketing, relying instead on word-of-mouth publicity Contract brewers Do not own breweries Outsource brewing to second-tier brewers with excess capacity Free from heavy capital investment, spend heavily on sales and marketing to build brands
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7 Redhook’s Production Process
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8 Summary of Performance Comparison Regional brewers Lower ROE, due to low asset turnover More volatile profitability A higher degree of operating leverage Contract brewers More stable and somewhat higher ROE ¾ But risk of not having complete control over the production process Interruption in product supply Lack of control over product quality Potential for consumer backlash
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9 Boston Beer: Relative Performance See the table on the next slide ROEs may vary depending on the choice of denominator: beginning, ending or average equity Based on the figures, Boston Beer and Pete’s, the two contract brewers, had similar ROEs Average of 56% for 1993 and 1994 Redhook, a regional brewer with its own production facilities, had a significantly lower ROE Average of 24% for 1993 and 1994 What are the key drivers of ROE?
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This note was uploaded on 04/12/2010 for the course FINA 537 taught by Professor Luxiaolei during the Spring '09 term at HKUST.

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Multiplies-example - FINA 537 Equity Valuation Professor...

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