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Monster Beverage Corporation: A fantastic growth story.

Opdateret: for 1 dag siden

Monster Beverage Corporation has been fantastic for shareholders, as it was the best-performing stock from 2000 to 2020. An investment of $100 in 2000 would have turned into $62.000 twenty years later. While you may not expect the same level of growth in the next twenty years, Monster Beverage Corporation may still be a valuable addition to your investment portfolio.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I do not own shares in Monster Beverage Corporation, but it has been on my watchlist for a long time. In the rest of the analysis, Monster Beverage Corporation will be referred to as Monster. If you are interested in copying my portfolio or learning about the stocks I have included in it, you can find more information here. As always, I will keep my analysis objective, and hopefully it can inspire you to conduct your own research on Monster. If you want to purchase shares or fractional shares of Monster, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

The company was previously known as Hansen's and was founded in 1935. Hansen's originally sold juice products and didn't launch the first Monster energy drink until 2002. In 2012, the company changed its name to Monster Beverage Corporation, and in 2015, it sold its juices, sodas, and other non-energy drink brands to Coca-Cola. Monster was solely focused on energy drinks until they acquired CANarchy, a craft beer and hard seltzer company, in 2022. Monster Beverage Corporation has four operating segments. The first is Monster Energy Drinks, which accounted for approximately 92% of net sales in 2023. This category includes Monster Energy drinks, Reign Total Body Fuel high-performance energy drinks, Reign Storm total wellness energy drinks, Bang Energy drinks, and Monster Tour Water. The second operating segment is Strategic Brands, which accounted for approximately 5% of net sales in 2023. This segment includes the energy drinks acquired from Coca-Cola in 2015, as well as its affordable energy brands, Predator and Fury. The third category is Alcohol Brands, accounting for approximately 2,5% of net sales in 2022. This category includes craft beers, hard seltzers, and "The Beast Unleashed," which is their first alcoholic Monster drink. The fourth category is "Other" (approximately 0,5% of net sales in 2022), which includes certain products sold by American Fruits and Flavors. The Monster Energy Drinks segment generates higher per case net operating revenues but lower per case gross profit margin percentages than the Strategic Brands segment. Meanwhile, the Alcohol Brands segment has lower gross profit margin percentages than the Monster Energy Drinks segment. Monster Beverage Company has developed a very strong brand moat over the years. Their primary target market consists of young males aged 18-32. Their marketing strategy focuses on extreme sports events, lifestyles, and gaming. They are known for their 16-ounce can, which they developed to compete with Red Bull. They analyzed that a 16 oz can would only result in limited damage to profit margins and would be a great way to compete with Red Bull's 8.5 oz can. Monster is a globally recognized brand, and its products are distributed in 158 countries around the world.

Contrary to most other companies, Monster has two co-CEOs, Rodney C. Sacks and Hilton H. Schlosberg. Both have been at Monster since a consortium led by Rodney C. Sacks and Hilton H. Schlosberg acquired Hansen's. Rodney C. Sacks has been the CEO since then, while Hilton H. Schlosberg was named co-CEO in January 2021. Previously, Schlosberg had served as the CFO, COO, and President. Both of them are graduates of the University of the Witwatersrand in Johannesburg. They have done a remarkable job since joining Monster. conducted an analysis of the best-performing stocks from 2000 to 2020, and Monster emerged as the top performer. If you had invested $100 in Monster in 2000, it would have grown to $62.000 by the end of 2020. These results are remarkable and demonstrate the exceptional performance of Monster's management. The management at Monster believes that one of the keys to success in the beverage industry is differentiation. They aim to make their brands and products visually appealing and distinctive from other beverages on retailers' shelves. This strategy has proven to be an accurate assessment. The management encourages innovation, and Rodney C. Sacks has previously stated, "One of the most important things is knowing that you are going to make mistakes and you may have to change." You must be prepared to change the packaging, flavor, and ingredients, and sometimes walk away from a product. You got to be able to do that quickly without excessive costs sunk into the project. If you can do that, you will be able to continue to innovate and develop different products until you hit upon a successful product". The combination of the management team's historical performance and values gives us a great deal of confidence in their abilities.

I believe that Monster has a strong brand moat. I really like the management as well. Now, let us investigate the numbers to determine if Monster meets our criteria for a strong moat. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will look into is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% each year. Monster has delivered fantastic numbers every year for the past 10 years. Monster only had three years with a return on invested capital (ROIC) below 20%. However, two of those years were in 2022 and 2023, which proved to be challenging for most companies due to macroeconomic factors. It is also worth noting that in the three years when the ROIC was below 20%, it still exceeded the 10% requirement. It is also encouraging to see that ROIC improved from 2022 to 2023, nearly reaching the 20% mark again. Thus, it is not something that worries me, as Monster has consistently delivered a high return on invested capital (ROIC).

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Despite encountering some challenges, Monster has shown significant growth in equity, with a compounded annual growth rate of over 18% from 2014 to 2023. In 2023, Monster reached its highest equity level ever. Hence, Monster has performed remarkably well.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Monster has consistently generated positive free cash flow for the past 10 years. Free cash flow was significantly down in 2022, primarily due to the acquisition of CANarchy. However, Monster managed to deliver its highest free cash flow ever in 2023, which is very encouraging. Levered free cash flow margin hasn't reached previous heights but significantly improved from 2022 to 2023, which is an encouraging sign. Free cash flow yield is relatively low at 2,4%. Even though it is around the ten-year average, this indicates that Monster shares are expensive. However, we will revisit this point later in the analysis.

Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. It isn't possible to calculate Monster's debt because Monster has no debt, which is obviously fantastic. It makes Monster even more interesting.

Like with all other investments, investing in Monster comes with some risks. One risk is competition. The beverage industry is highly competitive, as demand is driven by factors such as consumer preferences and disposable income. While Monster seems to have cracked the code on consumer tastes and frequently introduces new flavors, the company may need to consider reducing prices to stay competitive if disposable income for its customers decreases. Furthermore, in its annual report, Monster mentions that they have experienced and continue to experience competition from new entrants in the energy drink, energy shot, beer, and beyond beer categories. Some of the new entrants are soft drink brands such as Mountain Dew, which have added supplement ingredients to their products with the aim of marketing them as "functional" or energy beverages with "functional" benefits. Relying on bottling and distribution partners. Monster has transitioned all third parties' rights to distribute the company's energy drink products in the U.S. to members of TCCC's distribution network, which largely consists of independent bottlers and distributors. As independent companies, Monster's bottling partners, some of which are publicly traded companies, make their own business decisions that may not always align with Monster's interests. If Monster is unable to maintain operational and strategic alignment, agree on appropriate pricing, marketing, and advertising support, or if its bottling partners are not satisfied with Monster's brand innovation and development efforts, they may take actions that, while maximizing their own short-term profits, may be detrimental to Monster's interests. In its annual report, Monster mentions that disagreements have arisen in the past and may arise in the future. Regulations. In their annual report, Monster mentions that legislation has been proposed to restrict the sale of energy drinks, limit the caffeine content, require labeling warnings, impose excise taxes, limit product size, or impose age restrictions for the sale of energy drinks. Furthermore, there is an increased focus on the health consequences associated with obesity, which could lead to legislation aimed at reducing the consumption of sweetened beverages. Thus, if there are new legislations on energy drinks and/or sweetened drinks, it could impact the results of Monster.

Despite the risks, there is great potential for Monster. One aspect is the growth in international markets. Management has stated that they have great opportunities in some of the developing international markets, specifically mentioning China and India. Management mentioned that they are in the beginning of a growth phase in India, particularly focusing on Monster and Predator in India. They launched Predator in cans in India and are now gradually introducing PET bottles in the market. Currently, efforts are being made to address some volume production issues due to limited availability. However, once these production issues are resolved, management anticipates a significant opportunity for PET bottles in India. Monster has also recently introduced new flavors and Predator in China, where they are working on expanding availability and visibility. However, growth is not only seen in India and China. For instance, they have recently launched both Monster and Predator in Egypt. Where Predator has quickly established itself as a growing brand. Entering the alcoholic beverage market. Monster acquired CANarchy Craft Brewery Collective in a $330 million deal in 2022. By acquiring CANarchy, Monster now has exposure to the craft beer market, which is expected to grow at a CAGR of 11,2% until 2030. Additionally, Monster also gains access to the hard seltzer market, which is projected to grow at a CAGR of 14,9% until 2030. It not only diversifies their products into new markets but also serves as a catalyst for future growth. Monster has also launched its flavored malt beverage called The Beast Unleashed in 2023. Management will continue to expand the distribution of The Beast Unleashed in 2024. Furthermore, management has mentioned that Monster's alcohol innovation pipeline is robust, with several additional innovative product lines currently under development. Future growth for the energy drink segment. Monster's energy drink segment also has various growth catalysts that should benefit both the top and bottom lines. The energy drink market is expected to grow at a compound annual growth rate (CAGR) of 8,5% until 2030. Monster recently acquired Bang Energy after the company declared bankruptcy, which increased Monster's market share, as Bang holds a U.S. market share of 4.2%. Management expects that the Bang acquisition will result in gains in shelf space, as a number of retailers that had discontinued Bang because of the bankruptcy are now reintroducing it. Management has stated that this should start benefiting the company in the first half of 2024. Finally, Monster has implemented price increases in certain international markets in 2024, and these pricing adjustments have not significantly affected consumer demand. Thus, management is monitoring opportunities for further pricing actions in both the United States and internationally.

Now it is time to calculate the share price of Monster. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,54, which is from the year 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 18,5% in the next five years, but 15% is the highest number I use in my calculations. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Monster's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $46,20. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Monster at a price of $23,10 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.718, and capital expenditures were 235. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 165 in our calculations. The tax provision was 437. We have 1.041,571 outstanding shares. Hence, the calculation will be as follows: (1.718 – 165 + 437) / 1.041,571 x 10 = $19,11 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Monster's free cash flow per share at $1,44 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $22,73.

I believe that Monster is a great company with a strong brand moat. I really like the management team and have great confidence in their ability to grow the business. Competition is a risk for Monster as more companies are entering the industry. Lately, Celsius has been rapidly gaining market share. Nonetheless, Monster has a strong brand that should protect it from competition if it can continue to execute. Monster relies on bottling partners, some of which are publicly traded companies that make independent business decisions that may not align with Monster's interests. However, as Monster holds a large market share, I believe these bottling companies will continue to prioritize Monster. Laws and regulations could negatively affect Monster in the future, and this is something that needs to be monitored when investing in Monster. Monster is expanding internationally, with significant opportunities in India and China. Monster has recently entered the alcoholic beverage industry. While this sector may have lower profit margins, it provides Monster with the opportunity to "bank more dollars," as CEO Rodney C. Sacks described it. Finally, the energy drink segment has numerous growth catalysts, including a expanding market, the acquisition of Bang, and price increases. I believe the potential outweighs the risks, and I will purchase Monster stocks if it hits $40. This price point would offer me more than a 10% discount to the intrinsic value in both the Margin of Safety price and the Payback Time price.

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My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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