The Boston Beer Company, Inc. (NYSE:SAM) Looks Undervalued, But Short-Term Risks Point to More Downside

By
Stjepan Kalinic
Published
September 07, 2021
NYSE:SAM
Source: Shutterstock

After a promising start of the year, The Boston Beer Company, Inc. (NYSE: SAM) started showing a slowdown before catering over 40% during the summer. We are now 3 weeks from Q4, with no signs of the bearish trend slowing down.

Yet, even in the face of downgrades, some analysts remain positive about the company. In this article, we will examine the latest developments and attempt to estimate the company's intrinsic value based on the discounted cash flow (DCF) analysis.

The company recently announced that it would co-develop a new portfolio of non-alcoholic cannabis-infused beverages in Canada. The 5-year deal will see their subsidiary partner up with WeedMD RX and Peak Processing Solutions. Together they will develop the beverages infused with cannabinoid-rich biomass from Entourage Health, who will also be responsible for distribution. This collaboration will open the gates to a lucrative cannabis beverage market, set to grow at the compound annual growth rate (CAGR) at 17.8% between 2019 to 2025.

Canada cannabis beverage market growth, Source: Million Insights

Analysts remain short-term bearish but long-term bullish on the company. Currently, the main criticism is pointed toward underwhelming sales of the hard seltzer category, which has shown a decelerating trend. The company suffered a downgrade by Cowen, from Market Perform to Underperform, with a price target of US$400.

If you examine the chart below, US$400 was a significant level in 2019 and 2020, before the stock went parabolic.

NYSE: SAM Price History & Performance,September 7th, 2021

We generally believe that a company's value is the present value of all cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, look at the Simply Wall St analysis model.

See our latest analysis for Boston Beer Company

Is Boston Beer Company fairly valued?

We use what is known as a 2-stage model, which means we have two different periods of growth rates for the company's cash flows. Generally, the first stage is higher growth, and the second stage is a lower growth phase.

To begin with, we have to get estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren't available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value.

We assume companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will see their growth rate slow over this period. We do this to reflect that growth tends to slow more in the early years than in later years.

Generally, we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF ($, Millions) US$183.6m US$252.6m US$305.5m US$352.2m US$392.0m US$425.3m US$453.2m US$476.7m US$496.8m US$514.4m
Growth Rate Estimate Source Analyst x3 Analyst x3 Est @ 20.97% Est @ 15.28% Est @ 11.29% Est @ 8.5% Est @ 6.55% Est @ 5.18% Est @ 4.22% Est @ 3.55%
Present Value ($, Millions) Discounted @ 5.8% US$174 US$226 US$258 US$281 US$296 US$304 US$306 US$304 US$300 US$294

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.7b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For many reasons, a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case, we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way, as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.8%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r - g) = US$514m× (1 + 2.0%) ÷ (5.8% - 2.0%) = US$14b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$14b÷ ( 1 + 5.8%)10= US$7.9b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$11b. The last step is to then divide the equity value by the number of shares outstanding.

Compared to the current share price of US$563, the company appears quite good value at a 36% discount to where the stock price trades currently. Remember, though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NYSE: SAM Discounted Cash Flow September 7th, 2021

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows.

The DCF does not consider the possible cyclicality of an industry or a company's future capital requirements, so it does not give a full picture of its potential performance. Given that we are looking at Boston Beer Company as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC), which accounts for debt.

We've used 5.8% in this calculation, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, a reasonable range for a stable business.

Further Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead, the best use for a DCF model is to test certain assumptions and theories to see if they would lead to undervalued or overvalued.

For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Boston Beer Company, there are 3 relevant elements you should further examine:

  1. Risks: We've discovered 2 warning signs for Boston Beer Company (1 is concerning!) that you should be aware of before investing here.
  2. Future Earnings: How does SAM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High-Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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