If you had bought Monster Beverage (MNST, Financial) exactly 10 years ago, you would have enjoyed excellent capital appreciation that looks like this:
But as seen on the far-right side of the chart, investors have been bailing out lately, pushing the share price down by more than $12.00 or 18.1%.
Bad news, of course, for existing shareholders, but perhaps an opportunity for value investors to buy into a strong stock at a discounted price.
To test whether this is a good buy, we can use the Macpherson model, from Thomas Macpherson, to quantify Warren Buffett (Trades, Portfolio)’s idea of buying great companies at great prices:
- No debt: Monster has no debt, so it clears this hurdle.
- Return on Assets (ROS): 10-year median of 18.09%, which exceeds the minimum of 15%.
- Return on Equity (ROE): median 22.42%, which exceeds the minimum of 15%.
- Return on Capital (ROC): Over the last 10 years, the lowest ROC was 30.18%, well above the median threshold of 15%.
Monster obviously has the initial readings to be considered a great company (due diligence is required to confirm this thesis). A part of that due diligence will be in using ROC and return on tangible equity (ROTE) to assess the strength of the competitive moat:
- Median ROC: as noted above, is well above the target over the past 10 years.
- Median ROTE: Over the past 10 years, Monster's lowest retun on tangible equity was 23.95 (2015) and its highest was 65.79 (2017). Therefore, we can say it more than meets the standard median of 15%.
Based on these numbers, we can conclude the company has a strong moat and should be able to maintain its market share and prices in coming years.
Following up, the next issue is price: Does this stock have a margin of safety, or discount from its intrinsic value, enough to be considered having a great price?
The Macpherson model addresses that issue by examining the Discounted Cash Flow (DCF) analyses. DCF comes in three forms:
- Free cash flow-based.
- Earnings-based.
- Projected free cash flow (used with inconsistent revenue and/or earnings — and not applicable for Monster).
Based on a current price of $56.13 (from the All-in-One screener), the stock shows up as overvalued on both free-cash-based DCF ($44.04) and earnings-based DCF ($40.71).
Still, this may be an opportunity, since there hasn’t been a pullback of this magnitude for a year and a half, as shown in this three-year chart:
Why the pullback? Jessica Dye, writing in the Financial Times, said investors were reacting after quarterly sales failed to meet Wall Street estimates. Monster blamed the drop on reduced inventories by international distributors. More savvy investors likely held on, because the stock price rose 42.7% last year.
Part of that unseemly pessimism may have originated with high expectations set by Monster’s big deal with Coca-Cola (KO, Financial). With that 2015 agreement, Coca-Cola took a 16.7% stake in Monster, and the two companies exchanged some product lines (non-energy drinks from Monster to Coca-Cola, and energy drinks from Coca-Cola to Monster), and Monster got access to much of Coca-Cola’s distribution network.
Among the gurus followed by GuruFocus, nine owned shares on Dec. 31, 2017. Frank Sands (Trades, Portfolio) holds more than 10 million shares. Other gurus with 1 million or more shares are Spiros Segalas (Trades, Portfolio) and Jim Simons (Trades, Portfolio).
Turning to the analysts followed by NASDAQ.com, they have a largely positive outlook:
No doubt that bullishness is owed, at least in part, to its 12-month consensus target: $67.50, an increase of $11.64 or 17.2%.
For added perspective, let’s add a technical chart, with the 50- and 200-day simple moving averages. On such charts, the shorter average crossing above the longer average triggers a buy signal. Conversely, when the shorter crosses below the longer, it triggers a sell signal. In this case, the 50-day (red line) is the shorter average and the 200-day (blue line) is the longer average. Here is a five-year chart showing price (in green) as well as the two moving averages:
With the downward trend over the past two months, technical investors would wait and watch for a new crossover (investors who use only technical tools would use several other indicators before making any commitments, just as fundamental investors do not invest on any one metric).
Conclusion
Based on data from the Macpherson model, Monster Beverage Corp. is a great company available at a fair price.
The great company claim comes from beating (comfortably beating) the ROA, ROE and ROC thresholds of 15% over the preceding 10 years. In addition, it has a strong moat, as assessed with ROC and ROTE numbers that exceed the thresholds.
Beyond the numbers, the company has a partnership with world’s biggest soft drink company, Coca-Cola, a partnership that opened new distribution channels and brought in new products for Monster. At the same time, the market for energy drinks is strong, and Monster is a leading name in that sector.
Valuation of Monster stock is less obvious. The firm currently trades above its DCF intrinsic values but at levels that are lower than usual, thanks to the recent pullback. Whether this is a once-in-every-couple-of-years opportunity can be debated.
Investors considering Monster Beverage can go onto the next stage of fundamental research knowing they have a very good company and will have to decide if it is good enough to pay a fair, rather than great, price.
Disclosure: I do not own stock in any the companies listed and do not expect to buy any in the next 72 hours.
