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The BEER Act is Good for Boston Beer Company

March 20, 2011 | About:
Bill Smith

Bill Smith

30 followers
There’s a new bill being pushed through Congress called the Brewer’s Employment and Excise Tax Relief Act. It’s also known as the BEER Act, and is being sponsored by Senators John Kerry (D-Mass) and Mike Crapo (R-Idaho) and has 22 other Senate sponsors. This bill will do two things:

· Lower the excise tax on small brewers

· Re-define small brewer

The senators are updating the tax—it hasn’t been touched since inception in 1976. Additionally, they argue the microbrewery industry will be put on a more even footing with the mega-brewers. There are 1500+ microbrewers in the country which employ over 100,000 people. Tax cuts are always good, but especially so for this group. It’ll allow them to expand, create more jobs, and create increased demand for American grown input ingredients—barley, wheat, and hops. A breakout of the proposed excise taxes are itemized below in the table:



Marginal Output (bbls)


Current Tax per bbl


Proposed Tax per bbl


Marginal Reduction


0 – 60K


$7.00


$3.50


50%


60K – 2M


$18.00


$16.00


11%


> 2M


$18.00


$18.00


0%


Note: Barrel = bbl

For breweries producing less than 60K bbls, it would save them close to $20M. Additionally for brewers producing up to 2M bbls, the marginal rate would save an additional $27M in tax.

What defines a small brewer? The current cutoff is 2M bbls per year. If a brewer produces in excess of this ceiling, they are considered “large.” Boston Beer Company (SAM), producers of the Samuel Adams brand of beers, is the largest American owned brewery operating in the US now. Anheuser Busch, Miller, and Coors were all acquired by foreign companies. Boston Beer Company’s 2010 output was 2.2M bbls—a drop in the bucket for the big brewers. Yet according to the tax code, Boston Beer Company is now considered a large brewer even though they represent 0.9% of the total US beer market. If the bill goes through, it would raise the ceiling to 6M bbls per year as the cutoff for a small brewer, an important benefit to them. Most are privately owned, such as Sierra Nevada, Harpoon, and Yuengling. Boston Beer Company and the Craft Brewers Alliance (HOOK) are the only publicly traded small brewers.

The bill would have positive impacts for not only SAM and its shareholders, but for the rest of the microbrewing industry as well. Based on SAM’s 2010 output of 2.2M bbls, this tax proposal would net them approximately $4.1M in tax reductions on $464M of revenue. Since the passage of the bill is uncertain, I’m maintaining my fair value estimate of SAM at $83. See the existing analysis here.

SAM hails from Sen Kerry’s state of Massachusetts. Click here to read about the BEER Act, and S534 to track it through Congress.


Disclosure: Long SAM

About the author:

Bill Smith
I'm an IT professional and a private individual value investor with degrees in electronic engineering and business economics. My major investment influence is Warren Buffett--finding "wonderful companies trading at wonderful prices".

Rating: 4.6/5 (7 votes)

Comments

Alex Morris
Alex Morris - 3 years ago
Very interesting...

So these are the numbers:

60K x 3.50 = 210,000

1.94M x 2 = 3.88M

TOTAL = $4.1M (as you pointed out above)

They only made $50M last year... so we're adding roughly 8% in net income from this change?

And based off the $54M (and when you back out net cash of $50M), SAM is trading right around 20x TTM earnings... all sound correct to you Bill?

If so, makes SAM look pretty attractive with a PEG (based on trailing 3 year EPS growth) around 0.67. Do you know the number for % EPS growth expectations from management this year Bill?

Much appreciated for the article.
Bill Smith
Bill Smith premium member - 3 years ago
With yesterday's price and $54M (TTM) in owner earnings, I get a yield (TTM) of 4.65%. I believe they'll hit $61M in owner earnings for 2011.

I saw a variety of 5-year analysts EPS conensus forecasts: Yahoo-22.7%; Morningstar-16% or 27% (the data is bouncing back and forth for some reason). I've seen PEG ratios of 1 to 1.3.

I couldn't find anything specific from the company looking forward 5 years. For 2011 they estimate a 10% increase in production, with a 1% increase in prices...call it 11% on the top line. For the bottom line, consensus EPS growth estimates for 2011 are: Yahoo-13.4%; MSN Money-15.4%.

As far as my DCF of owner earnings, it looks like it would add about $4 to fair value. But the bill's not certain.

Hope that helps.

v/r

Bill

Alex Morris
Alex Morris - 3 years ago
It does, thank you Bill.

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