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Energy Drink Companies Are a Solid Investment

June 24, 2014 | About:
Vinay Singh

Vinay Singh

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In the age-old test of which drink tastes better, there may be a new contestant in Monster Beverage (MNST). This company - through its subsidiaries - markets and sells, as well as develops and distributes beverages worldwide. Many of its drinks are marketed as carbonated energy supplements that have gone head-to-head with other similar drinks, such as 5-Hour Energy. The company was established in 1985 and is headquartered in California.

Making room for monster

Monster Beverage currently holds almost a 40% market share in the energy drink arena - although this may soon change based on a recent lawsuit alleging a consumer's death due to drinking too much of the company's flagship beverage.

One of the most impressive features about this company is that it has no debt to speak of - a nearly impossible feat in today's corporate environment. This gives the company a literal debt-to-equity ratio of zero - and this is a very favorable sign.

One of the ways that Monster has been keeping itself near the top of its market category is through the launch of new flavors - including "rehab" drinks. Although it remains to be seen whether or not this will catapult the company to new category heights, analysts do expect a gain of approximately $0.05 in its earnings per share for the first quarter.

As of the most recent quarter, Monster came in higher than the industry average for revenue growth - and the firm's overall revenue increased by almost 15% over the year-ago period. This also helped Monster increase its earnings per share by more than 10%.

Is there another key player in the cola wars Now?

Monster could very well be the next big player in the cola wars - a test that has for years been played out between Coca-Cola (KO) and PepsiCo (PEP). Although there's a new game in town, the big cola giants aren't exactly backing down.

In fact, Coca-Cola, with its almost a $200 billion market cap and approximately 4.5 billion shares, has been working to keep both consumers and shareholders happy - and for the most part, it has succeeded. Since the recession, the stock price has come back to provide a total return of 33% to Coca-Cola's investors.

And, while the company's more sugary drinks aren't as much in demand today by more health-conscious consumers, Coca-Cola has moved into a number of new and healthier product lines, such as bottled water.

In addition, Coca-Cola’s 10% increase in dividend payout also has the potential to satisfy its shareholders, providing an annual dividend yield of 2.7%. Coupled with a share price that is expected by analysts to increase by more than 8.5% over the next 12 months, this old cola-wars competitor is hanging tough.

Growing company

Likewise, PepsiCo is also keeping itself above board by growing company revenue and operating cash flow. Here too, though, PepsiCo isn't just relying on sales of its old tried-and-true products to keep it strong. This competitor has also become tough in its snack-foods division, with impressive year-over-year results in this division's profits. This also likely contributed to the company's overall 12% rise in profits.

PepsiCo currently has a cash-flow margin in the low teens, a tad lower than Coca-Cola’s margin in the high teens. But PepsiCo makes up for that loss by growing sales at a faster rate than its rival.

Still, high commodity costs, a fierce competitive environment in the emerging markets and ever-increasing advertising costs could weigh on the future EBITDA margin. But PepsiCo has recently announced a multi-year cost-synergies program that will generate almost $2 billion of cost savings by the end of next year. This will help PepsiCo to improve its operating margin.

Just like with Coca-Cola and PepsiCo, Monster will also need to continue its more diverse product line in order to capture more consumer dollars. While Monster will likely never take the place of either Coca-Cola or PepsiCo, the company has done a great job of carving out a niche for itself as a producer of products that can provide an energy boost yet with a different twist. In addition to competing in the cola segment, Monster has also positioned itself as an alternative to coffee and other similar caffeinated drinks.

The bottom line

Although Monster Beverage does not pay its shareholders a dividend, its higher-than-average revenue growth as compared with the industry could be one reason alone to invest in this company. Monster's shares are already up by 4.5% year-to-date, so it is definitely moving in the right direction. With its positive forward-looking prospects, Monster Beverage could be either a good alternative - or a good companion - for investors' other beverage-company shares.


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