When Covid-19 hit last winter, it meant hard times for many manufacturers and sellers of food and beverages. However, while Monster Beverage Corporation (MNST, Financial) did experience disruptions in the second quarter of 2020, it had already rebounded by the third, producing the follwoing results:
- Net sales rose 9.9% year-over-year to $1.25 billion
- Net income shot up 16.3% to $347.7 million
- Net income per diluted share jumped 19.6% to $0.65.
All in all, the company reported what it called the highest quarterly net sales in its history in the 2020 third quarter. That helped improve the results for the first nine months, which were as follows:
- Net sales increased by 6.9%
- Net income was up by 10.0%
- Net income per diluted share grew 12.7% to $1.75.
About Monster Beverage
Based in Corona, CA, Monster Beverage is a holding company with subsidiaries that develop and market energy drinks, including Monster Energy® and more than two dozen other beverages. It is part of the "alternative" beverage industry, which altogether generated wholesale sales of $58.6 billion in the U.S. in 2019.
It operates under three segments:
- Monster Energy Drinks, which includes its namesake beverage and Reign Total Body Fuel (higher performance energy drinks)
- Strategic Brands, which handles a group of energy drink brands that were acquired from Coca-Cola (KO, Financial) in 2015 and affordable energy drink brands
- The 'Other' segment includes products sold by its subsidiary, American Fruits and Flavors, to independent third-party customers, as well as corporate and unallocated business.
Monster reached a major agreement with Coca-Cola in 2015, a deal that saw Coca-Cola take a significant ownership position (16.7%) in Monster. It also involved a swap of products, in which Monster's non-energy drinks went to Coca-Cola, while the latter's energy drinks went to Monster. Importantly, Monster gained access to much of Coca-Cola's distribution network.
Competition
The above deal means Coca-Cola is no longer a serious competitor with Monster, but lots of other companies are. GuruFocus lists one other competitor with more than a billion dollars in revenue, and that is National Beverage Corporation (FIZZ, Financial). National Beverage leads off this way on the About Us section of its websit:
"National Beverage Corp. innovatively refreshes America with a distinctive portfolio of sparkling waters, juices, energy drinks (Power+ Brands), and, to a lesser extent, Carbonated Soft Drinks."
There are also Gatorade products owned by PepsiCo Inc. (PEP, Financial), as well as also competition from "new entrants in the energy drink and energy shot categories." Further, there are existing beverage companies that add some supplements to existing products to create drinks that are given "energy" labels, but Monster considers them "refreshment" drinks.
Despite a bevy of competitors, Monster appears to maintain a competitive advantage and moat based on technical criteria. It has an operating margin of 35.02% and a net margin of 26.99%, as well as a return on equity (ROE) of 28.40%.
Fundamentals
It's not often we see a company with a financial strength score of 9 out of 10. Monster achieves it because it has no debt and its other metrics are strong.
Consider the Piotroski F-Score, which is 8 out of 9 and means the company met all but one of the benchmarks. Gross margin this year is lower than last year, but Monster missed by very little - the gross margin for the trailing twelve months was 0.59824132 versus 0.59885906 for the preceding twelve months.
The Altman Z-Score is also high, showing the possibility of bankruptcy is extremely low.
Finally, the return on invested capital (ROIC) is 34.24% vs. the weighted average cost of capital (WACC) of just 8.09%. Management has allocated its capital well.
Profitability
What's the source of that high return on invested capital? Note the high margins and ROE (return on equity) on this table:
At the bottom of the table, we see the three growth lines for revenue, Ebitda and earnings per share without non-recurring items. All are into double digits and reinforced by the fact that earnings per share growth is faster than revenue growth.
As well as being high, the profitability is also quite consistent. It has a business predictability rating, based on revenue per share and Ebitda per share growth rates, of 4.5 out of 5 stars.
Dividends and share buybacks
Monster does not pay a dividend, but in recent years it has reduced the number of shares outstanding, thus increasing value per share:
In March of 2020, the board of directors authorized the repurchase of up to $500 million worth of shares, with no expiry date. Only a small portion of the fund was used by the end of the third quarter. The news release for that period noted that $441.5 million was still available.
Valuation
I wouldn't expect a company with this earnings power to be cheap unless investors can get in during a pullback; there have been a number of dips, but would they be enough to provide a margin of safety?
The GuruFocus Value Chart arrives at a modestly overvalued conclusion:
The price-earnings ratio suggests overvaluation. It is 40.58, which is well above the 10-year median of 25.82 of the Beverages – Non-Alcoholic industry. Its own 10-year median is 35.34.
The PEG ratio, which is the price-earnings ratio divided by the five-year Ebitda growth rate, is 2.72, again suggesting modest overvaluation.
Tthe discounted cash flow (DCF) calculator shows overvaluation as well, based on a solid 4.5 out of 5 stars for predictability.
Gurus
Through the first nine months of 2020, the gurus were doing more selling than buying:
Of the nine gurus who held Monster stock on Sept. 30, the biggest three positions were those of:
- Jim Simons (Trades, Portfolio) of Renaissance Technologies, who owned 12,484,290 shares at the end of the third quarter, good for a 2.36% stake in the company and representing 1% of his firm's total assets. He reduced his holding by 3.28% during the quarter.
- Frank Sands (Trades, Portfolio) of Sands Capital Management, who held 3,243,064 shares after a reduction of 50.32%.
- Steven Cohen (Trades, Portfolio) of Point72 Asset Management, who created a new holding when he bought 1,209,357 shares.
Conclusion
Monster Beverage has weathered the storm with minimal damage. Indeed, its third-quarter results suggest it is coming out the other side even stronger. Is a wonderful company at a price that's not so fair, but it has no debt, offers above-average profitability, consistently grows its revenue and earnings per share and has many opportunities to keep growing the business.
As a result, its share price has also marched steadily upward, making it modestly overvalued. There have been dips where new investors might jump in, but getting in and getting a margin of safety would likely involve a long wait.
For that reason, value investors will likely avoid the company despite the pristine balance sheet. Growth investors might consider a closer look, given the company's history.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
Read more here:
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