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Monster Beverage Corporation: A fantastic growth story.

Opdateret: 30. okt. 2023


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 could 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 very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.



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 (accounting for approximately 92% of net sales in 2022), which includes their Monster Energy drinks, as well as other brands like Reign. The second operating segment is Strategic Brands, which accounted for approximately 6% of net sales in 2022. This segment includes the energy drinks acquired from Coca-Cola in 2015, as well as their line of affordable energy drinks. The third category is Alcohol Brands, accounting for approximately 1,5% of net sales in 2022. This category includes craft beers, hard seltzers, and "The Best 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. Monster Beverage Company has developed a very strong brand moat over the years. Their primary target market comprises young males aged 18-32. Their marketing strategy focuses on extreme sporting events, lifestyles, and gaming. They are known for their 16-ounce can, which they developed to compete with Red Bull. They analyzed that a 16oz can would only result in limited damage to profit margins and would be a great way to compete with Red Bull's 8,5oz can. Monster is a globally recognized brand, and its products are distributed in 157 countries around the world.


On the contrary to most other companies, Monster now 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. Howmuch.net 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 are, you can have a look at "MY STRATEGY" on the website.


The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, and we want the numbers to be above 10% in all years. Monster has delivered fantastic numbers every year for the past 10 years. Monster only had two years with a return on invested capital (ROIC) below 20%. One of those years was 2022, which proved to be a challenging year for most companies. In those two years, Monster managed to deliver a ROIC above the 10% requirement. 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. There are some bumps along the way, but looking at the picture, Monster has increased its equity by a 21,6% compounded annual growth rate from 2013 to 2022. Hence, Monster has performed remarkably well.



Finally, we will investigate 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. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Monster has consistently generated positive free cash flow for the past 10 years, which is reassuring to observe. Free cash flow was down in 2022, primarily due to the acquisition of CANarchy. Additionally, macroeconomic factors also had an impact on free cash flow as well. Excluding 2022, Monster has consistently delivered a high levered free cash flow margin, which is impressive. However, the current free cash flow yield indicates that Monster is trading at a high price. However, we will delve into this further in the analysis.



Another important aspect to investigate is the level of debt, specifically whether a business has a 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 it seems like Monster has cracked the code on consumer tastes and often develops new flavors, the company might need to lower prices to compete if disposable income drops in the United States, which accounts for 63% of sales. Increasing supply costs. In the annual report, Monster mentions that inflation has affected and continues to affect certain raw material and packaging costs, commodities, and other inputs globally. If the costs of packaging supplies continue to increase, Monster may be unable to pass these costs onto consumers, which would have an adverse effect on their results. Lower margins would result in less profit. 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 increased focus on the health consequences associated with obesity, which could lead to legislation to reduce the consumption of sweetened beverages. Thus, if there is legislation on energy drinks and/or sweetened drinks, it could impact the results of Monster.


Despite the risks, there is great potential for Monster. One is future growth. According to Market Research Future, the energy drinks market is projected to reach $86 billion by 2026, reflecting a compound annual growth rate (CAGR) of 7%. Currently, Europe is the highest-generating market, and Monster has been able to increase its market share in several European countries. However, the Asia Pacific market is expected to be the fastest-growing market. While Monster's net sales have been fluctuating in China, they have mentioned in various earnings calls that they remain optimistic about the prospects for the Monster brand in China in the future. 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 10,8% according to Fortune Business Insights until 2028. Additionally, Monster also gains access to the hard seltzer market, which is projected to grow at a CAGR of 22,9% until 2030 according to GlobeNewswire. It not only diversifies their products into new markets, but it could also serve as a catalyst for growth in the future. Winning Market Shares. Nielsen produces a quarterly report on the energy beverage market, and the most recent quarter was favorable for Monster. Their product sales in the U.S. increased by 12,2%, surpassing Red Bull, their largest competitor, whose sales only grew by 10,2%. Monster also gained market share in various European, Latin American, and Asian countries. Hence, the growth story of their core products is not over yet.



All right, we have gone through the numbers, potential and risk regarding Monster, and now it is time for us to calculate a price for Monster. To calculate a price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS of 1,12, which was the value in 2022. I chose an estimated future EPS growth rate of 15%. (Finbox expects EPS to grow 17,2% per year in the next 5 years, but I use 15% as the highest rate.)The estimated future PE is 30, which is double the growth rate. This is based on the historical highest PE being higher. Additionally, we already have a minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $33,60. 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 $16,80 (or lower, obviously) if we use the Margin of Safety price.


Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating cash flow last year was 1.520. The capital expenditures were 191. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 134 in our further calculations. The tax provision was 415. We have 1.046,616 outstanding shares. Hence, the calculation will be as follows: (1.520 - 134 + 415) / 1.046,616 x 10 = $17,21 in Ten Cap price.


The last calculation is the Payback Time. I also described in "MY STRATEGY". With Monster's Free Cash Flow Per Share at 0,67 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $10,61.


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. It seems like there is plenty of growth to come, both in their core sector and also due to their recent acquisition. While we have seen the effect that inflation has had on results in 2022, it appears to be a short-term challenge and not something I am concerned about in the long term. The market in which they operate will always be highly competitive, but Monster has consistently delivered good results. I see no reason why that should not continue. Regulations could potentially impact the business, but thus far we have not witnessed any tangible effects. Nonetheless, it will continue to be a long-term risk that needs to be monitored. However, I believe that the potential rewards of investing in Monster far outweigh the risks, and I would be thrilled to include Monster Beverage Corporation in the portfolio. I don't think I will ever be able to buy Monster shares at a 50% discount. But as Warren Buffett once said, "It is better to buy a wonderful company at a fair price than a fair company at a wonderful price." It means that I would buy Monster if it drops to $34,42, which is the intrinsic value of the Ten Cap price.


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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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