California-based Monster Beverage Corp. (MNST, Financial) develops, markets, sells and distributes energy drinks, concentrates for energy drinks and related products.
The company is a brand powerhouse. It owns roughly 10,000 (and counting) registered trademarks worldwide. The most valuable one has to be the Monster portfolio, including Monster Energy, Java Monster, Monster Energy Ultra, Espresso Monster and many more, which generated over 90% of the company’s sales over the past three years.
In many people’s minds, the Monster brand is instantly linked to the energy drink, which develops the sustainable competitive advantage for the core business. As demonstrated below, the company consistently generated superior returns on invested capital compared to its peers, including Coca-Cola (KO, Financial) and Keurig Dr Pepper (KDP, Financial), for more than a decade.
Monster Beverage outsources its manufacturing process to third-party bottlers and mainly sells its products to full-service bottlers, such as Coca-Cola. While owning a vast distribution network may be a common source of the moat for beverage companiess, the asset-light model at Monster Beverage could save the company lots of capital expenditures during regional expansion and new product launches. As of fiscal 2018, 61% of the sales were handled through U.S. full-service bottlers and distributors, 31% through international full-service bottlers and distributors and the remaining 8% through club stores, mass merchandisers, chains, wholesalers and others.
The company does not pay a dividend, which means it retains all its earnings to create long-term shareholder value. There is share repurchase activity from time to time, but there is little movement in terms of shares outstanding (after dilution) for recent years (see below).
The stock's valuation appears a bit hefty, anyways. With a five-year average price-earnings ratio of 43, price-sales ratio of 9 and price-book ratio of 10, investors should have seen minimal value creation out of the share repurchase program.
Monster Beverage has a sound balance sheet with no debt and plenty of liquidity, and its growth has been mostly organic. That leaves over the only option for management to “consume” excessive free cash – reinvestment in the current businesses.
On the “defense” side, we highly appreciate the company’s efforts to widen its economic moat through considerable investments into its brands year in and year out, mainly through sports sponsorships, digital campaigns and offline events. The Monster portfolio has been gaining market share against peers, including its major rival, Red Bull. It has become the leading player in the energy drink category. Additionally, Monster Beverage beats Starbucks (SBUX, Financial) in the promising energy coffee subcategory (in terms of dollar share at the convenience store).
In the meantime, we also see the improved efficiency in cash generation. Per the chart below, the cash conversion cycle has decreased significantly over the past couple of years, indicating higher negotiation power against customers and suppliers.
On the “offense” side, we see plenty of reinvestment opportunities for Monster Beverage’s long-term growth, mainly supported by the innovation pipeline, international expansion and industry tailwind (e.g., growth momentum in the energy drink and ready-to-drink coffee categories).
Monster Beverage has a culture of innovation for the long term, focusing on “line-extension.” New products come out of the pipeline almost every year. Some examples include zero-sugar Monster Ultra and the energy coffee product line.
The market size of the U.S. is only half the size of the overseas energy drink market, which is growing at high single digits, while international sales only account for less than a third at Monster Beverage. The company is currently selling its products in over 150 markets globally. But many of those markets seem underpenetrated to the Monster brands, which are gaining strong momentum in capturing value share. For example, the company is seeing double-digit value share growth in the markets of Australia, Brazil, Germany, Japan, Mexico and Russia as of 2018. Monster’s growth in all of these markets was exceeding the respective category growth of energy drinks.
Monster Beverage can continue to expand into new regions, including Indonesia, Saudi Arabia and a couple dozen more in 2019 alone.
When it comes to investment risk, we consider changing consumer preferences as a significant long-term factor. While we are confident the brand power can effectively protect the business in the energy drink category, the growing trend of a healthy lifestyle may serve as a headwind. Concentrated reliance on Coca-Cola’s distribution and bottling, or the lack of its own distribution, could also potentially cause some uncertainty for Monster’s long-term performance.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Monster Beverage.
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