Monster Beverage Corporation has been a fantastic growth story. Is it time to buy now?
Monster Beverage Corporation has been on my watch list for quite some time as it has grown exceptionally and features as a case study in Christopher Mayer's great booked called "100 Baggers - stocks that return 100-to1 and how to find them".
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.
I have previously written analysis of both Pepsi and Coca-Cola. Hence, I found it naturally to do an analysis of Monster Beverage Corporation as well (only referred to as Monster in the rest of the analysis). I don't own shares in the company, but it has been on my watch list for a long time. Not only does it feature as a case study in the book "100 baggers", but it was also mentioned several times in my workshop with Phil Town. As always, I will keep my analysis objective, and hopefully it can inspire you to do your own research on Monster.
The company was previously known as Hansen's and was founded in 1935. Hansen's were originally selling juice products and didn't launch the first Monster energy drink until 2002. In 2012 the company changed their name to Monster Beverage Corporation, and sold their juices, sodas, and other non-energy drink brands to Coca-Cola in 2015. It now solely focuses on energy drinks and has developed a very strong brand moat. Their core market is young males in ages 18-32, which means their marketing strategy focus on extreme sporting events and lifestyles, and gaming. They are known for their 16oz can, which they developed to compete with Red Bull, as they analyzed that a 16oz can would only mean a limited damage to profit margins and would be a great way to compete with Red Bull's 8,5oz can. Monster is a renowned brand around the world, and their products are distributed in 154 countries.
On the contrary to most other companies, Monster now has two co-CEOs in 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 ever since, while Hilton H. Schlosberg was named co-CEO in January 2021, while he previously had served as CFO, COO, and president. Both are educated from the University of the Witwatersrand in Johannesburg. They have done a remarkable job since they became part of Monster. Howmuch.net made an analysis of the best performing stocks on the period from 2000 to 2020 and Monster came out on top. If you had invested $100 into Monster in 2000, it would have grown into $62.000 by the end of 2020. These are remarkable results and shows just how good the management at Monster has performed. The management at Monster believes that one of the keys to success in the beverage industry is differentiation, making their brands and products visually appealing and distinctive from other beverages on the shelves of retailers, which has proven to be a true 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 have to be prepared to change the packaging, change the flavor, change the 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 historical performance and values of the management team, makes is safe to say that have a lot of confidence in the management.
I have determined that Monster has a brand moat. I really like the management as well. Now let us investigate the big five numbers to see if Monster lives up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. These are fantastic numbers, and well above the requirement of 10 %. Companies with a ROIC of more than 20 % in all the benchmark are companies that instantly goes to my watch list.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The number of Monster looks good, it is just under the 10 % requirement in the last year, but it doesn't worry me. First because it is so close to reaching the 10 % requirement. Second because last year was special due to the pandemic, so it is a year I don't give too much importance in any of my analysis.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again, Monster delivers fantastic numbers in all the benchmarks. A company with a worst performing benchmark with a 19,8 % EPS growth rate is certainly an interesting opportunity.
The Equity Growth Rate is also known as the most important of the four growth rates. All right, there is one benchmark that is underwhelming. It isn't something alarming as Monster has shown that it can continue to grow their equity in the following benchmark. Obviously, you would like a better number in that 5 year benchmark, but it is certainly no cause for alarm.
Finally, we investigate the Cash Growth Rates. Monster delivers once again. Most of the benchmarks are above 20 %, and all of them are above the requirement of 10 %. Nothing else to say that Monster seems like to be a very intriguing investment based on the cash growth rate as well.
To shortly summarize the five numbers from Monster. The ROIC is fantastic and that alone would made me interested in the company, if it wasn't already on my watch list. The cash growth rate and the EPS growth rate also deliver above 10 % in all the benchmarks, while the sales growth rate slightly underperforms during the pandemic, which is no reason for concern. The equity growth rate has one underwhelming benchmark but all in all is strong as well. If I look at the bigger picture of all the historical numbers, I'm certainly very interested in Monster. Few companies deliver numbers as Monster, and I would encourage everyone to look further into the company.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. It isn't possible to the calculation on Monster, as Monster has no debt, which is obviously fantastic. It only makes Monster even more interesting.
Like with all other investments, investing in Monster comes with some risks. I read through the annual report, and they have some risks that I would like to mention. One large risk, especially short-term, is the price and shortages of raw materials. In the latest conference call, the management talked about how they experience shortages in aluminum, and how these shortages result in Monster not being able to fully satisfy the demand in the 2nd quarter in the Unites States and EMEA (Europe, Middle East, and Africa). They expect these challenges to continue into 3rd quarter and maybe longer. Another risk is more long-term and that is that the beverage industry is highly competitive. This highly competitive market may result in Monster needing to reduce their prices, which will hurt profit margins. Finally, Monster rely highly on bottlers and distributors to distribute their products (56 % of their customers), and if they are unable to maintain good relationships with existing bottlers and distributors, their business could suffer.
Despite the risks, there are great potential for Monster. According to Market Research Future the energy drinks market is expected to reach $86 billion by 2026, which equals a 7 % CAGR. Currently, Europe is the highest generating market, and Monster was able to increase their market share in several European countries in the last quarter. However, the fastest growing market is expected to be the Asia Pacific market, and while Monster's net sales decreased in China in Q2 2021 compared to Q2 2020 (it was mainly because they launched Dragon Tea in 2020), they did mention in their conference call that they remain optimistic about the prospects of for the Monster brand in China going forward. Regarding the short-term risks of aluminum shortages, Monster has entered into new supply agreements with two new aluminums can suppliers in the United States, which are expected to be operational in the fourth quarter in 2021. Competition will be a long-term risk for Monster, and especially Red Bull is hard to keep up with. However, the management seems to be very optimistic about competing with Red Bull going forward, co-CEO Rodney C. Sacks has previously stated: "We believe that Monster has the potential to be an international brand and the real challenger to Red Bull around the world. We believe that we are the only brand out there today that can effectively do that".
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 at 2.75 (which is between the one from 2020 and the current one). I chose an Estimated future EPS growth rate of 11 (Finbox has it at 10,8 but I believe 11 is doable), Estimated future PE 22 (which is the double of growth rate, as the historical highest PE is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $42,46, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Monster at price of $21,23 (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 1.364,16. The Capital Expenditures was 67,27. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 47,089 in our further calculations. The Tax Provision was 216,56. We have 528,89 outstanding shares. Hence, the calculation will be like this: (1.364,16 - 47,089 + 216,56) / 528,89 x 10 = $28,99 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 2,66 and a growth rate of 11 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $35,02.
I believe that Monster is a great company, which a huge brand moat. I really like the management and have great confidence in them being able to grow the business. It seems like there are plenty of growth to come in the sector they operate in. Personally, I'm more concerned with the short-term risks than the long-term risks, and I wonder how supply shortages and freight prices will affect Monster the rest of the year. Nevertheless, I would love to invest in Monster but unfortunately the price is currently too high for me. I doubt that it will ever drop to my highest calculated buy price but if I should ever be able to get at the PAY BACK TIME price at $35,02, I wouldn't hesitate to load up. I will continue to follow Monster, and hopefully I will be able to scoop it up some day.
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