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Sleeman Breweries
Company Analysis (Case Study)
November 28, 2003
Michael Sousa 0199975
Albert De Sousa 0157687
Rudy Ruberto 0199968
Table of Contents
Company Description……………………………………………………………………………..3
Stock Prices and Press Releases…………………………………………………………..4
Stock Prices Chart and Areas Discussed………………………………………………….6
Ratio Analysis……………………………………………………………………………………..6
Profitability Ratios…………………………………………………………………..…….6
Leverage Ratios…………………………………………………………………………...8
Market Value Ratios………………………………………………………………………8
Liquidity Ratios………………………………………………………………………..….9
Activity Ratios…………………………………………………………………………….9
Pro Forma Planning...……………………………………………………………………………11
Past Balance Sheets………………………………………………………………………11
Pro Forma Balance Sheets …...………………………………………………………….12
Past Income Statements………………………………………………………………….13
Pro Forma Income Statements…………………………………………………………...13
Pro Forma Calculations…………………………………………………………………..13
Target Ratio Discussions………………………………………………………………...18
Financing Plans…………………………………………………………………………..20
Cash Flow Analysis……………………………………………………………………………...21
Average Free Cash Flow Growth Rate and Explanation………………………………...23
Discounted Cash Flow Valuation……………………………………………………………..…24
PVFCF, Market Value, “Fair” Stock Price, Valuation…………………………………..24
Bibliography…………………………………………………………………………………..…25
Company Description
Sleeman Breweries Ltd. is Canada’s leading premium brewer. The company operates seven breweries: Sleeman Brewing & Malting Co. Ltd., Upper Canada Brewing Company, Okanagan Spring Brewery, Shaftebury Brewing Company, La Brasserie Seigneuriale, The Stroh Canada Family, and Maritime Beer Company. Sleeman brews in small batches from all-natural ingredients and targets beer consumers in the on-premise and take-home markets throughout Canada. Virtually all sales are in Canada with the exception of a small test market in the U.S.A. and the United Kingdom.
- Sleeman Brewing & Malting Co. Ltd.
This is their flagship business headquartered inGuelph, Ontario. This company produces the core Sleeman premium brands; Cream Ale, Silver Creek Lager, Honey Brown Lager, Original Dark, Sleeman Steam, Premium Light, and Sleeman Clear.
- Upper Canada Brewing Company
This company was combined with Sleeman in 1998. It produces a family of premium beers including Upper Canada Lager, Dark Ale, Light Lager, Wheat Lager, Rebellion Lager, Point Nine, Maple Brown Ale, and Anniversary Ale.
- Okanagan Spring Brewery
This brewery joined with Sleeman Brewing & Malting Co. Ltd. in 1996, and immediately provided Sleeman with a leadership position in the British Columbia beer market. Okanagan Spring produces a number of premium brands at Vernon, British Columbia, which include Extra Special Pale Ale, Premium Lager, Honey Blonde Ale, Traditional Pilsner, Classic Nut Brown Ale, and Old English Porter.
- Shaftebury Brewing Company
This company has benefited from a more focused marketing campaign and broader distribution, since joining with Sleeman. The Shaftebury brands include Shaftebury Cream Ale, Shaftebury Pale Ale, and Shaftebury Rainforest Amber Ale. There are two seasonal beers produced; Shaftebury Solstice Ale, and Shaftebury Winter Solstice Ale.
- La Brasserie Seigneuriale
This brewery was acquired in July 1998, providing Sleeman with its first physical facility within the Quebec market. Seigneuriale provides Sleeman with unique Belgian-style beer brands, including Seigneuriale, Blonde, Triple, and Reserve. Acquiring La Brasserie Seigneuriale also provide Sleeman with some strategic advantages, including licensing and distribution agreements.
- The Stroh Canada Family
This company was added late in 1999 and marks Sleeman’s entry into the value-priced category. It provides Sleeman with Canada’s most imported beer, Old Milwaukee, and also includes Colt 45, Rainier, and several other smaller Stroh brands. Acquiring The Stroh Canada Family has provided Sleeman with enhanced national distribution, improved purchasing power, and economies of scale.
- Maritime Beer Company
This company, based in Dartmouth, Nova Scotia, was added in September 2000. Maritime Beer Company produces Atlantic Storm, Black Pearl, Kings, Halifax 1749, and Frosted Frog brands. This acquisition provides Sleeman with a physical presence in Atlantic Canada, and increases its overall production capability.
Stock Prices and Press Releases
March 17, 1999 – The price dropped from just over $8 in January, to approximately $7.25.
Sleeman completes a record year with its strongest fourth quarter earnings in history.
- Press Release Highlight: Sleeman Breweries Ltd. announced that its fourth quarter profit increased by 44% to $1.4 million or $0.08 per share from $970,000 or $0.07 per share in the same period last year. The fourth quarter’s profitability capped a year of record earnings, which saw net income rise by 76% to $6.8 million or $0.44 per share from $3.8 million or $0.29 per share in 1997. “It was important to us that Sleeman finish the year strongly,” said John Sleeman, Chairman and CEO. “Our consistent performance shows that the Company’s strategy of creating a national family of craft breweries through core brand growth and timely acquisitions is adding significant ongoing value for our shareholders. We intend to continue Sleeman’s positive momentum into 1999 through sustained growth in our core brands and through integration of improvements in our most recent acquisitions.”
June 7, 1999to August 1999– The price increased to $7.50. Sleeman’s Okanagan Spring
Brewery introduceda new traditional pilsner.
- Press Release Highlight: “Brewed in the traditional way, it is a rich, golden colored beer that is moderately hopped and very easy to drink,” said Rick Knudson, Managing Director, of Okanagan Spring Brewery. “We’ve managed to combine the best of the old-world brewing traditions with western Canadian beer drinkers taste preferences. This is a beer that should appeal to those who like a unique tasting but very drinkable beer.”
August 18, 1999to January 2000– The priced dropped to under $6 per share. No associated
press releases were available to explain the drop in price.
January 2000 toMay 15, 2000– The price increased to over $7 per share. Sleeman began 2000
with a record first quarter.
- Press Release Highlight: A statement was made to announce revenue increased 65% to $25.2 million from $15.3 million in the first quarter of 1999. Net income increased by 45% to $1.0 million, or $0.07 per share compared to net income of $717,000, or $0.05 per share in the same period last year. Sleeman had strong volume increases in the quarter largely due to the incremental sales from the Stroh portfolio. For the quarter, total volume increased 122%, reaching 175,000 hectoliters, up from 79,000 hectoliters in the first quarter of 1999.
March 2001 to September 2001 – Share price gain from $7 to just under $11 per share. On
March 5, Sleeman acquired the Maritime Beer Company and increases expansion into the east coast market. On April 30,Sleeman signs an agreement with South African Breweries to expand its market. On August 8,Sleeman delivers record revenue and profits for the second quarter. Total sales increased by 3%.
December 12, 2001– Share price dropped to just over $9. Sleeman purchases 100% of the
Quebec based brewer, Northern Goose Brewing Company Inc.
- Press Release Highlight: "This acquisition is consistent with our strategy to increase our influence over the distribution channel for our products in Canada's four largest beer markets," said John Sleeman, Chairman and CEO. "By assuming direct ownership of Northern Goose, we expect to expand our customer service infrastructure and improve the information flow of sales data necessary to continue building ourpresence in one of Canada's most important beer markets.
January 2002 to May 2002– The stock prices rises from $9 to approximately $11.50. On
January 3, Sleeman announces management changes and that Doug Berchtold, President
and COO resigns. On April 4, Sleeman launches unconventional campaign ad featuring talented unsigned bands with the hope that drinkers will look for quality, proving that quality can be found beyond labels.
June 2002 to January 2003– The stock price fluctuate between $10 and $11. On July 2,
Sleeman announces its long term agreement with Grolsch, adding to its premium import brands. On September 12, Sleeman enters an agreement with Japan’s Sapporo Breweries limited to provide contract production for Sapporo’s products in the United States, beginning in December 2002. On December 17, Sleeman announced the hiring of two senior management directors, Dan Fox and Steve Pelky, effective January 1, 2003.
January 2003 toMarch 6, 2003 – The stock price drops from over $10 to $8.25. Sleeman
releases its financial results for the fourth quarter and year endedDecember 28, 2002.
- Press Release Highlight: The fourth quarter net revenue increased by 10% over 2001, to $37.8 million, due to an 8% increase in total volume, which compared favorably to an industry growth of 1.5% in the quarter. Net revenue for the year increased by 11% to $157.1 million, as total volume for the year grew 10% to 1,122,000 hectoliters. 2002 earnings before interest, taxes, depreciation and amortization (EBITDA) increased 5% to $29.9 million.
March 2003 to Present – The price has climbed to just below $10 per share. On May 5,
Sleeman Breweries Ltd. and Diageo Canada Inc. announced distribution agreements that
will see Diageo draught and packaged brands, Guinness and Kilkenny. On July 10, management changed and John Bailey was appointed as Managing Director of the company’s Quebec regional operations. On September 16, they announced its expansion and agreement with Sapporo Breweries Ltd. of Tokyo, Japan. On November 6, Sleeman delivered record revenue and net income up 17%, due to Sleeman Clear successfully introducing its premium beer to drinkers in the Ontario market, in late August.
Stock Prices Chart Including Areas Discussed
Ratio Analysis
Profitability
Ratio / 1999 / 2002 / 2001 / 2002 / AnheuserReturn on total assets (%) / 3.9 / 4.9 / 4.9 / 5.6 / 13.8
Return on equity (%) / 11.3 / 14.3 / 13.4 / 13.7 / 54.7
Earnings per share ($) / 0.42 / 0.58 / 0.64 / 0.79 / 2.23
Price/earnings ratio / 15.9 / 11.5 / 14.1 / 13.8 / 21.2
- Important ratios in profitability
Return on total assets measures the firm’s overall effectiveness in generating profits with its available assets.
The cumulative growth rate of ROA = (5.6/3.9)1/3 – 1 = 12.8%.
Return on assets has been increasing and this trend should continue to increase in order to reach the target ratio of 13.8%. To accurately estimate return on total assets, we will consider the growth rate of total assets and net income.
The cumulative growth rate of total assets = (220081/166171)1/3 – 1 = 9.8%
The cumulative growth rate of net income = (12321/6549)1/3 – 1 = 23.4%
Growth rate of return on assets = (1.234/1.098) – 1 = 12.4%
To calculate the minimum number of years necessary to reach the target ratio following the growth rates with no additional changes being made is calculated as follows:
T = [ln(13.8/5.6)]/[ln(1.124)] = 7.7 years
Return on equity measures the return earned on the owners’ investment in the firm.
The cumulative growth rate of ROE = (13.7/11.3)1/3 – 1 = 6.6%.
Return on equity has been increasing and this trend will have to continue to increase in order to reach the target ratio of 54.7%. It will take a substantially long time to reach this target ratio if no other alterations are made. To accurately estimate return on equity, we will consider the growth rate of earnings available for common shareholders (net income) and common equity.
The cumulative growth rate of net income = (12321/6549)1/3 – 1 = 23.4%.
The cumulative growth rate of common equity = (90197/58079)1/3 – 1 = 15.8%.
Growth rate of return on equity = (1.234/1.158) – 1 = 6.6%
To calculate the minimum number of years necessary to reach the target ratio following the growth rates with no additional changes being made is calculated as follows:
T = [ln(54.7/13.7)]/[ln(1.066)] = 21.6 years
Earnings per share, represents the dollar amount earned on behalf of each share. This measure is closely watched by the investing public and is considered an important indicator of public success.
The cumulative growth rate of EPS = (0.79/0.42)1/3 – 1 = 23.4%.
EPS has been increasing and this trend will have to continue to increase in order to reach its target ratio of 2.23. To accurately estimate EPS, we will consider the growth rate of earnings available for common shareholders (net income) and number of common shares outstanding.
The cumulative growth rate of net income = (12321/6549)1/3 – 1 = 23.4%.
The cumulative growth rate of shares outstanding = (15596203/1573302)1/3 – 1 = -0.3%.
Growth rate of EPS = (1.234/-1.003) – 1 = -233.0%
We are not able to calculate the minimum number of years necessary to reach the target ratio because we can not take the ln of a negative number.
Price/earnings ratio is not a true measurement of profitability because it only measures what an investor is willing to pay for each dollar of the firm’s earnings. This ratio is not important and therefore it is not necessary to calculate any growth rates.
Leverage
Ratio / 1999 / 2002 / 2001 / 2002 / AnheuserDebt ratio (%) / 65.0 / 65.7 / 63.0 / 59.0 / 78.4
Debt/equity ratio (%) / 128.3 / 119.3 / 98.4 / 82.0 / 216.3
Times interest earned / 3.89 / 2.97 / 3.26 / 4.08 / 8.08
- Important ratios in leverage
Debt ratio measures the proportion of total assets financed by the firm’s creditors. Sleeman is fairly close to Anheuser in respect to its debt ratio.
The cumulative growth rate of the debt ratio = (59.0/65.0)1/3 – 1 = -3.2%.
The debt ratio is decreasing and under the current growth rate Sleeman will not be able to achieve its target ratio of 78.4 without making different alterations. A minimum number of years necessary to reach the target ratio cannot be calculated.
Debt/equity ratio measures the proportion of long-term debt to common equity. The debt/equity ratio can be affected by large amounts of current liabilities like accounts payable and accruals. This ratio can provide a misleading picture of the true debt situation. This ratio is not important and therefore it is not necessary to calculate any growth rates.
Times interest earned measures the firm’s ability to make contractual interest payments. This ratio is not particularly important for a brewery and therefore it is not necessary to calculate any growth rates.
Market Value Ratios
Ratio / 1999 / 2000 / 2001 / 2002 / AnheuserPrice/Book / 1.62 / 1.52 / 2.02 / 1.80 / 16.0
Price/Sales / 1.01 / 0.70 / 1.03 / 1.03 / 3.0
- Important ratios in market value
Ratios in this category are difficult to calculate due to the uncertainty of the future market conditions. Too much weight is given to economic forces outside the company for Sleeman to control these ratios.
Liquidity
Ratio / 1999 / 2002 / 2001 / 2002 / AnheuserCurrent ratio / 1.08 / 0.96 / 0.96 / 1.11 / 0.84
Quick ratio / 0.57 / 0.56 / 0.52 / 0.59 / 0.46
- Important ratios in liquidity
The current ratio measures the liquidity calculated by dividing the firm’s current assets by the firms’ current liabilities. The brewery industry is not overly concerned with its short-term obligations, being in such a liquid market it turns over its inventory frequently. The rule of thumb equalling 2 does not apply to the brewery industry. The same can be said for the quick ratio which is a measure of a firm’s most liquid assets divided by current liabilities.
Activity
Ratio / 1999 / 2002 / 2001 / 2002 / AnheuserAverage age of inventory (days) / 109.2 / 63.5 / 101.4 / 105.5 / 25.3
Average collection period (days) / 65.9 / 56.8 / 61.9 / 65.1 / 17.0
Average payment period (days) / 176.7 / 96.8 / 143.7 / 181.3 / 63.3
Fixed asset turnover / 1.98 / 2.42 / 2.10 / 2.24 / 1.62
Total asset turnover / 0.58 / 0.78 / 0.72 / 0.71 / 0.96
- Important ratios in activity
Average age of inventory measures the effectiveness of the company’s management of inventory.
The cumulative growth rate of average age of inventory = (105.5/109.2)1/3 – 1 = -1.1%.
The average age of inventory is decreasing and this trend should continue to decrease in order to reach its target ratio of 25.3 days. It will take a considerable amount of time at this growth rate for Sleeman to reach its target ratio. To accurately estimate the average age of inventory we will consider the growth rates of inventory and average COGS per day.
The cumulative growth rate of inventory = (22843/14404)1/3 – 1 = 16.6%
The cumulative growth rate of average COGS per day = [(79059/365)/(48157/365)]1/3 – 1 = 18%
Growth rate of average age of inventory = (1.166/1.188) – 1 = -1.9%
It is not possible to calculate the minimum number of years to reach the target ratio because you cannot take ln of a negative number. The growth rate is very small that it would take to long to reach the target ratio without any alterations being made.
Average collection period is the average amount of time needed to collect accounts receivable. This number is only meaningful when compared to the firm’s credit terms, industry averages, and past experience.
The cumulative growth rate of average collection period = (65.1/65.9)1/3 – 1 = -0.4%.
The average collection period is decreasing at very small rate and it would take an extremely long period of time to reach the target ratio of 17.0 days. Calculating the growth rates would not provide any useful information. To accurately calculate the minimum number of years to reach the target ratio, we would require additional information to draw a definitive conclusion about the firm’s effectiveness of the firm’s credit and collection policies.
Average payment period is the average amount of time needed to pay accounts payable. This measure is meaningful only in relation to the average credit terms extended to the firm, industry averages, and past experience.
The cumulative growth rate of average payment period = (181.3/176.7)1/3 – 1= 0.9%.
The growth rate can be deceiving because its payment plans may have to stretch to match their payables and average collection period and avoid the need to finance their accounts receivable. At this positive growth it is not possible to reach the target ratio of 63.3 days. Sleeman will require alterations in their policies to reach this target ratio.
Fixed Asset Turnover indicates the efficiency with which the firm uses its net fixed assets to generate sales. This ratio is only meaningful when compared to previous values for the company to an industry average. In this case the higher ratio is preferred, but it is also possible for these ratios to be too high.
The cumulative growth rate of fixed asset turnover = (1.0/0.75)1/3 – 1 = 10.3%.
Sleeman is currently near the target ratio and is experiencing an increase in its growth rate. They will have to monitor this ratio to make sure it does not get to high.
Total Asset Turnover indicates the efficiency with which the firm uses its assets to generate sales. Again this number can be deceiving because this ratio uses the historical costs of asset.
The cumulative growth rate of total asset turnover = (0.71/0.58)1/3 – 1 = 7.3%
Total asset turnover has been increasing and this trend should continue to increase in order to reach the target ratio of 0.96. To accurately estimate total asset turnover, we will consider the growth rate of sales and total assets.
The cumulative growth rate of total assets = (220081/166171)1/3 – 1 = 9.8%
The cumulative growth rate of sales = (157053/96110)1/3 – 1 = 17.8%
Growth rate of return on assets = (1.178/1.098) – 1 = 7.3%
To calculate the minimum number of years necessary to reach the target ratio following the growth rates with no additional changes being made is calculated as follows:
T = [ln(0.96/0.71)]/[ln(1.073)] = 4.3 years
Pro Forma Planning