If someone was to ask what is the best-performing S&P 500 stock over the past three decades, the usual answers are typical growth stalwarts such as Apple Inc. (AAPL, Financial), Amazon.com Inc. (AMZN, Financial), Dell Technologies Inc. (DELL, Financial) or even Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). But the shocking answer is Monster Beverage Corp. (MNST, Financial). If an investor placed $10,000 in Monster Beverage in 1992, that would be worth over $24 million today. Not many investors thought selling caffeinated sugar water would lead the pack over fast-growing technology companies.
Based in California, Monster develops and markets a wide variety of beverages. It offers carbonated and non-carbonated energy drinks, ready-to-drink iced teas and juice drinks, lemonades, juice cocktails, single-serve juices, fruit beverages, ready-to-drink coffee drinks, energy drinks, sports drinks, single-serve still waters and flavored sparkling beverages. Top brands include Monster Energy, Monster Energy Ultra, Monster MAXX, Java Monster, Espresso Monster and Caffé Monster. Other related brands include Monster Dragon Tea, Reign Total Body Fuel, NOS, Full Throttle, Burn, Samurai and Relentless.
The Coca-Cola Co. (KO, Financial) bought a 16.7% stake in the company for $2.15 billion in 2015. This stake has since grown to 19.3% due to share buybacks by Monster. The company currently has a market capitalization of approximately $54 billion.
Alcoholic beverages
In February 2022, the company began its foray in the adult beverage category with the acquisition of CANarchy Craft Brewery Collective. This included craft breweries such as Oskar Blues Brewery, Cigar City Brewing, Squatters Craft Beers, Wasatch Brewery, Deep Ellum Brewing Company, Perrin Brewing Company and Revitalyte.
The company recently launched its first flavored malt beverage alcohol product called The Beast Unleashed. The drink contains 6% alcohol by volume and is available in four flavors. It was initially released in six states and with expansion plans set for the second quarter of 2023 and with a goal of national reach by the end of this year.
Financial review
On Feb. 28, the company reported strong 2022 results with revenue increasing 14% to $6.3 billion compared to $5.5 billion in the prior year. The gross margin decreased to 50.3% compared to 56.1% in the same period last year. The decrease in the gross margin was primarily the result of increased ingredient costs as well as secondary packaging materials cost. Increased supply chain costs also contributed to the margin decrease. Operating income for year decreased to $1.58 billion from $1.8 billion a year ago. Earnings per share declined 13.1% to $2.23.
In a statement, Vice Chairman and Co-CEO Hilton H. Schlosberg said:
“We are pleased to report another quarter of continued revenue growth. The energy drink category continues to expand globally. The results from our overseas operations were again overshadowed by the strength of the United States dollar in the quarter. Gross profit margin percentages increased on a sequential quarterly basis as a result of our pricing actions, as well as certain of our supply chain challenges moderating. We believe that some of the increased costs that we have experienced in 2022 are likely to be transitory, although cost inflation, including increases in energy particularly in EMEA, ingredient and other input costs, as well as co-packing fees, remain challenging.”
The company maintains a very strong balance sheet with $2.7 billion in cash and investments and no outstanding traditional debt. Monster typically generates strong levels of free cash flow, which came out to $699 million in 2022.
Valuation
Consensus analyst earnings per share estimates for Monster are approximately $3 for 2023, which puts the company selling at 33 times earnings. The enterprise value/Ebitda ratio is also elevated at 23.
The GuruFocus discounted cash flow calculator creates a value of $75 per share when using $3 as the starting point and a 15% long-term growth rate. The average price target for the five primary Wall Street analysts covering the company is $110.
The company does not pay a dividend, but has an active share repurchase program in place. Stock repurchases over the past three years are $717 million, $14 million and $596 million.
Guru trades
Gurus who have purchased Monster stock or added to their positions include Joel Greenblatt (Trades, Portfolio) and Caxton Associates (Trades, Portfolio). Investors who have reduced of sold out of their postions include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates.
Summary
Monster remains a growth story on the top line despite the inflationary and supply chain issues still prevelent across most industries in North America. International growth will be a key factor as the U.S. only represents roughly one-third of all energy drinks sold on a global basis. International sales for Monster on a constant currency basis increased 23% in the fourth quarter of 2022.
The stock has typically carried high valuations throughout most of its history and continues to do so today. However, unless bottom-line growth resumes at double-digit rates, a price-earnings ratio over 30 seems excessive and does not create a margin of safety at this time.
