Not long after we slouched into the 21st Century, a company invented an energy drink that it called Monster. This sports drink became immensely popular, growth skyrocketed and investors bought its shares as if they had swallowed too much caffeine (perhaps they literally had).
But even a recent blockbuster deal with Coca-Cola (KO, Financial) could not keep the share price of Monster Beverage Corp. (MNST, Financial) on its upward trajectory this year:
With the declining share price, Monster now can be found on the Undervalued Predictable and Buffett-Munger screeners.
Are Monster shares a deal at this price?
History
1930s: Hubert Hansen and sons begin selling juice to film studios and retailers in Southern California under the Hansen name.
1970s: Tim Hansen (the grandson of Hubert) develops and markets a variety of sodas and juices, also under the Hansen's label.
1988: The company files for bankruptcy and is acquired by the California CoPackers Corp. and renamed Hansen Natural Company.
1992: Hansen buys Monster for $14.5 million.
2002: Monster Energy drink introduced and becomes a blockbuster.
2012: Name changes from Hansen's Natural to Monster Beverage Corp., under the new ticker MNST.
2015: Monster and Coca-Cola close a complex deal which sees several significant brands exchanged and Coca-Cola take a 17% ownership position in Monster.
History based on information provided at Wikipedia.org, Fortune and a Coca-Cola news release.
Monster is a company that has bounced around in different areas of the beverages and non-alcoholic industry for years. Its most recent, and perhaps most important, makeover came last year when it reached a deal with Coca-Cola.
Monster’s business
Monster Beverage Corp. is a holding company that has several operating companies in the beverage industry. According to its 10-K for 2015 (unless otherwise noted, all information in this section comes from this document), the company has three operating segments:
- Finished Products: includes Monster Energy drink products
- Concentrate: includes concentrates for Strategic Brands energy drinks acquired from The Coca-Cola Company
- Other: includes brands disposed of in the deal with Coca-Cola.
In this excerpt from the 10-K, the company lists the brands under which it sells its products:
The Monster Energy brand can be broken out into several sub-brands:
The following slide (from the 8-K of Jan. 13, 2015) summarizes the brand holdings of Monster and Coca-Cola, post the completion of the deal:
As it points out in this slide, the new portfolio allows it to compete across premium and price categories:
Monster considers itself part of what is known as the alternative beverage category, which includes:
“. . .non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, single-serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks, and single-serve still water (flavored, unflavored and enhanced) with “new age” beverages, including sodas that are considered natural, sparkling juices and flavored sparkling beverages.”
The company estimates domestic U.S. industry wholesale sales for 2015 at about $42.5 billion, an increase of nearly10% over estimated industry sales in 2014.
Monster’s main line of business is Monster Energy Drinks, carbonated energy drinks that contain vitamins, minerals, nutrients, herbs and other dietary ingredients, and are marketed through its full-service distributor network.
It routinely adds and discontinues products, according to market tastes and its own priorities. In 2015, it added seven new products in addition to those it acquired from Coca-Cola.
The company outsources manufacturing to third-party bottlers and contract packers. At the end of 2015, it sold its products in 156 countries.
Monster is a sprawling company with a broad selection of products within the energy drink sector. To some extent, its operations have become more streamlined and focused through its agreement with Coca-Cola.
Revenue
The Finished Products segment (mainly Monster Energy drinks) provided 92.5% of consolidated net sales in fiscal 2015, just below the proportions provided in the two previous years. Concentrate brought in 5.3% and Other brought in 2.2% of consolidated net sales in fiscal 2015.
This chart shows Monster’s actual revenue back to 1990 and estimated forward through 2018:
This excerpt shows how revenues break out by customer lines:
Strong revenue growth began to appear in the mid-2000s and is expected to continue through the next few years. The biggest share of that revenue comes from American sources, particularly full-service bottlers and distributors.
Competition
Monster says the beverage industry is highly competitive and that “[their] products compete with a wide range of drinks produced by a relatively large number of companies, many of which have substantially greater financial, marketing and distribution resources than we do.”
Named competitors include its partner Coca-Cola, PepsiCo (PEP, Financial), Dr Pepper Snapple Group Inc. (DPS, Financial) and Red Bull GmbH.
This table from 2015’s 8-K report shows Monster Energy neck-and-neck with Red Bull (the category also includes two other Monster products, NOS and Full Throttle):
While Monster faces competition from several giants, it has helped itself through its deal with Coca-Cola and by having multiple products within its chosen niche.
Moat
Morningstar argues that Monster has a narrow economic moat:
“We believe Monster has carved a narrow economic moat. The company’s brand intangible assets and lack of owned distribution create high profitability and low capital needs versus peers and should generate returns on invested capital well in excess of weighted average cost of capital for the foreseeable future.”
Barrons recently created the Next 50 Index, which comprises stocks loved by young investors, also known as Millennials. It describes the list this way,
“The index tilts toward fast-growing companies, and it has a good shot at beating the market over the coming years. . . . The Next 50 firms cater to more than just millennials, but most have disproportionate exposure to younger consumers.”
One of the 50 stocks to make that index is Monster Beverage, which should provide forward comfort to investors.
Monster Beverage has a strong position within its energy niche in the highly competitive beverage market and can be expected to hold onto that position in coming years.
Growth
As noted above, Monster’s revenue is expected to continue growing robustly. This chart shows it has also grown its revenue per share:
As for underlying growth in the energy sector, this headline from Beverage Daily may say it all, "The World’s Unquenchable Thirst for Energy Drinks" and predicts the market will grow 40% by 2020. That is based on huge growth numbers in China and lesser, but still robust numbers in other markets.
If there is a threat that could affect that growth, it may be the imposition of soda taxes in more and more jurisdictions. Researchers at Harvard, cited by Bloomberg, estimate taxes imposed by three Bay Area cities could reduce soda consumption by 20% locally. Similar initiatives are expected to continue popping up in many other jurisdictions.
At the same time, the industry has a strong lobby group and has managed to defeat soda tax initiatives in a number of cities. Nevertheless, the challenges keep coming at the industry.
With the worldwide market for energy drinks continuing to grow rapidly, Monster has an opportunity to grow its niche significantly. While soda taxes may slow consumption somewhat in America and Europe, it is unlikely to affect Chinese consumption.
Other
Monster Beverage Corp. is incorporated in Delaware and headquartered in Corona, California (at the aptly named address of 1 Monster Way).
At the end of 2015, it employed 1,659 persons, about 1,000 of them full-time.
Stocksplithistory.com reports two splits by the company, a 2-for-1 in 2012 and a 3-for-1 in 2016 (just this month).
Chairman and CEO Rodney Sacks has held those positions since 1990.
Senior Vice President - Finance, Controller Kelly Thomas Ă‚ joined Monster from California CoPackers and has been with the company since 1992 (officer information from Reuters.com.).
Ownership
Eleven of the gurus followed by GuruFocus have positions in Monster; the biggest is Steve Mandel (Trades, Portfolio) with 12,448,479 shares, which represent 2.18% of the outstanding shares. Spiros Segalas is second with almost 7 million shares and Caxton Associates has the third largest holding, nearly four and a half million shares.
Almost 75% of the company is owned by institutional investors, with minor holdings by shorts and insiders, according to this GuruFocus table:
As noted above, Coca-Cola owns 16.7% of the company.
Major holdings by gurus, institutional investors and insiders suggest a high level of confidence in Monster Beverage.
By the numbers
The company reports in its 10-K that it cancelled and repurchased shares in fiscal 2015 through a series of complex arrangements. That information is available here.
Monster Beverage’s price is close to the 52-week low. At first glance, its P/E appears quite high, while the ROA and ROE clock in in the mid-teens. The company does not pay a dividend.
Financial strength
Monster receives high ratings of 9 from GuruFocus for both financial strength and profitability & growth:
Interestingly, while it receives high marks from GuruFocus, it receives a mediocre 5 for its Piotroski F-Score. However, in a separate note, GuruFocus says, “Monster Beverage Corp. has an F-score of 5, indicating the company's financial situation is typical for a stable company."
As we note from the financial strength infographic, Monster has no debt, which makes it a potentially appealing candidate for value investors.
Previously, we have noted its revenue growth. Turning to its EBITDA (earnings before interest, taxes, aepreciation and amortization), we see a solidly upward trend:
To add a bit more context to the earnings, we will also look at its EPS (earnings per share) with estimates for 2016 and 2017:
Free cash flow does not follow the same pattern. In its 10-K, the company reports changes that include financing involved in the deal with Coca-Cola:
Looking behind the third-quarter 2016 earnings reports, Market Realist reports,
“The growth rate slowed due to an unfavorable comparison with 3Q15 sales, which included advance purchases made by customers in reaction to a planned price increase on certain Monster Energy drinks.” And, “This was the second consecutive quarter in which the company missed analysts’ earnings estimate.”
Leaving aside some changes due to the deal with Coca-Cola, the company is posting strong metrics in the right places and can boast of having no debt, as well as new friends in high places.
Valuation
Despite the bad news in the latter part of the preceding section, Market Realist also tells us that 13 of 20 analysts have a Buy rating and seven have a Hold. None has a Sell rating.
In this 10-year chart, we see that the current P/E (green line) is near the middle of a range within which it has fluctuated for the past decade:
This chart of price-earnings divided by earnings growth, PEG, shows a rapid escalation into the overvalued zone by the end of 2015 (which is where the chart leaves off):
Since then, the downward spiraling price has pushed the PEG ratio down to 1.91, which is at the high end of the fair valuation range.
In comments accompanying its Next 50 list (50 stocks most loved by young consumers), Barrons noted,
“The companies in the index tend to have higher growth in both revenue and profits than the overall market. They’re also more expensive than other stocks based on traditional financial measures like price-to-earnings ratios.”
Finally, as noted in a recent article, guru Donald Yacktman likes growth companies at a value price, based on what he calls the Forward Rate of Return (normalized free cash flow yield + earnings + inflation). GuruFocus provides this current assessment of Monster’s forward rate of return, “During the past 13 years, Monster Beverage Corp's highest Forward Rate of Return was 119.20. The lowest was 19.00. And the median was 29.60.” With the current rate at just over 19, the company is close to its all-time low on this metric.
While the price of Monster Beverage has fallen far this year, it still is not cheap by conventional metrics. Investors may have given the share price a rough ride lately, but they have not dismounted in significant numbers.
Conclusion
If you are a Donald Yacktman fan looking for growth stocks at value prices, Monster Beverage Corp. likely belongs on your short list. While its growth has been compromised lately, it should accelerate again as changes brought about by the Coca-Cola deal are integrated and exploited.
With no dividend, it obviously is not a stock for income investors.
As for traditional value investors, the price still seems a bit rich, as evidenced by its P/E and PEG metrics. Yes, the price has fallen far enough to put it on the Undervalued Predictable and Buffett-Munger screeners, but not enough to make it a compelling value.
Disclosure: I do not own shares in any of the companies noted in this article, nor do I expect to buy any in the 72 hours after publication.
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