GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Monster Getting Monstrous (MNST)

March 03, 2013 | About:
Monster (MNST) saw its stock pop 9% after announcing it would change the wording on its energy drinks. The move was due to pressure related to issues surrounding health concerns and energy drinks. So is this a sign that the regulatory concerns that have kept the stock under pressure are exaggerated?

The stock has fallen from its mid-2012 high of nearly $80, to trade around $50 per share now. This comes after the company was hit with concerns over slowing growth, and shares took a huge hit in October 2012 when news of a potential lawsuit broke against the company for the death of a teenager.

e77204509d7178f55d354c5b672fe1a8.png

There is still overhang on the stock, related to the FDA's investigation on whether energy drinks can be dangerous to teens and people with heart problems, but I feel the pressure has been done. Monster recently announced plans that will involve using federal guidelines for its products, such as listing “nutrition facts” instead of “supplement facts” on their products. Although this does not mean the company is "home-free," it is a step in the right direction and should help protect the company against future lawsuits.

Monster’s energy drinks is the company's top segment and accounts for over 90% of revenues. The energy market is rather robust, where total U.S. sales of alternative beverages is estimated to be $32 billion, according to Beverage Marketing Corporation. As far as market share is concerned, in dollars, Red Bull is the leader, but in volume Monster is the leader. The market share shapes up as follows:

In dollars:

Red Bull 34% Monster 29.5%

5-Hour Energy 13%

Rockstar 10%

Coke brands 5%

Pepsi brands 4.5%

In volume:

Monster
38%

Red Bull 25%

Rockstar 14.4%

Coke brands 6.7%

Pepsi brands 6.4%

5-Hour 1.5%

Monster has a solid position near the top of the energy drink industry, but how does the competition stack up?Other major competitors in the beverage industry include PepsiCo (PEP), Coca-Cola (KO), Starbucks (SBUX) and Dr. Pepper (DPS). While Red Bull and Rockstar are both private brands, major beverage companies Pepsi and Coke have a hand in the energy drink market. Pepsi has its AMP drink and Coke has Full Throttle.

Pepsi recently announced fourth quarter results that showed EPS of $1.09 which was in line with management’s target, but down 5% from the same quarter a year ago. As far as caveats for Pepsi investors, the company has seen slowing North American sales, despite increased marketing focused in the area. Coca-Cola is the leader in the U.S., as far as market share for carbonated drinks, and posted fourth quarter results that included EPS of $0.45, up 15% from the same quarter last year. However, opportunities could be afoot for Pepsi, given Coca-Cola has been lowering its advertising spending. Ad spending as a percent of sales has been in decline since 2006.

Dr. Pepper is also in the energy drink market, although having only a small presence with its Venom drink. Dr. Pepper posted fourth quarter results that included EPS of $0.82, which was a decline of 2.4% year over year. Dr. Pepper’s problems lie in the fact that the company operates in the U.S., Canada and Mexico, with little-to-no international exposure, putting Dr. Pepper at a disadvantage to other beverage companies. Even with a sole focus on North America, Dr. Pepper still does not stack up to Pepsi and Coca-Cola, which together make up over 60% of the U.S. liquid beverages market in terms of volume.

Starbucks indirectly competes with energy drinks with its coffee and tea products. What’s more is that the coffee company recently introduced a green coffee extract drink called "refreshers," which has been compared to energy drinks. The coffee giant reported EPS of $0.57, with earnings growing 14% year over year, in line with management expectations. Challenges for Starbucks include a European slowdown and consumer preferences internationally. I think coffee and energy drinks are different markets, and I am also skeptical on its refresher drink, which has received mixed reviews.

Reasons to love energy drinks. What makes the energy drink market relatively unique is its high-margin, high-priced business, whereby volume energy drinks make up only 3.3% of the carbonated beverages industry, but in dollars it accounts for 11.8% of the market, according to Beverage Digest. The fact that Monster’s business is indeed higher margin makes it a compelling investment opportunity with high returns on capital above other major publicly traded companies:

Return on Investment:

  • Monster 33%
  • Pepsi 11%
  • Coca-Cola 13%
  • Starbucks 25%
  • Dr. Pepper 11%
Return on Equity:

  • Monster 33%
  • Pepsi 28%
  • Coca-Cola 27%
  • Starbucks 27%
  • Dr. Pepper 27%
Putting Monster another step above major competitors is its "healthy" balance sheet, carrying no debt and having $590 million in cash. Check out Monster's debt-to-equity ratio.

Debt to Equity:

  • Monster 0%
  • Pepsi 127%
  • Coca-Cola 99%
  • Starbucks 11%
  • Dr. Pepper 120%
From both a profitability and solvency standpoint, Monster appears to be in good shape. But digging a bit deeper, Monster also offers investors the best priced growth, as measured by its price-to-earnings-to-growth ratio:

Price to Earnings to Growth:

  • Monster 1.5
  • Pepsi 4.8
  • Coca-Cola 2.3
  • Starbucks 1.6
  • Dr. Pepper 2.1
Don't be fooled. Not only am I interested in the company, but so are a number of other investors. This includes the fact that a number of insiders are heavily invested in the company, with the top officers, CEO and CFO, owning almost 20% of the company. In addition, there are a number of billionaire hedge funds invested in the stock. These include Janus Capital (3.67 million shares), Renaissance Technologies (1.9 million shares) and Citadel Advisors (1.45 million shares), who collectively own over 4% of the company.

Although Starbucks is a close second on a number of the metrics above, and while I believe the company is a strong buy (read more here), I believe Starbucks presence will remain in the coffee market and that Monster is the best play on the energy drinks market. There is still speculation that remains around Monster’s regulation issues, but the stock could well be a solid investment opportunity in a rapidly growing industry.

About the author:

mdhargrave
Investment adviser and startup striver.

Visit mdhargrave's Website


Rating: 3.8/5 (4 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK