Monster Beverage Corporation has been a fantastic growth story. Is it time to buy now?
Opdateret: 4. jul.
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. If you want to copy my portfolio or see what stocks that I have in the portfolio, you can read about it here. Monster not only 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 must 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 believe that Monster has a brand moat. I really like the management as well. Now let us investigate the numbers to see if Monster lives up to our requirements 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 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 years. Monster has delivered some fantastic numbers every year in the last 10 years. Monster only had one year below a 20 % ROIC but still managed to fulfill the requirement. Whenever I see a company that delivers numbers like Monster has, I'm intrigued, and you should be too.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. There are some bumps along the wat but looking at the picture Monster has 10x their book value in 10 years. It is a remarkable achievement and yet another reason to be intrigued by Monster as an investment case.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Monster has delivered a positive free cash flow every year for the last 10 years. Sure, it did decrease a little from 2020 to 2021 but there will always be some bumps along the way. Overall, it is very reassuring to see that free cash flow has grown from 238 in 2012 to 1.098 in 2022.
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 earnings. It isn't possible to the calculation on Monster, as 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. In their annual report they always mention the price of and shortages of raw materials as a risk. Monster is especially affected by the cost of aluminum as it is used for their cans. While the price of aluminum has dropped from its highs in February it is still higher than pre-pandemic, and high aluminum prices will cut into the margins and hurt profit. Other macro-economic factors. In the first quarter conference call in 2022, the management mentioned how macroeconomic factors resulted in the gross profit margin decreasing 6 % year over year. One Factor that hurt Monster are high freight prices due to higher oil prices and container shortages both inbound and outbound. Another is higher packaging costs due to higher prices on materials and salaries. Luckily, management believes that the current environment is transitory. Hence, these should only be considered short-term risks. A long-term risk is competition. The beverage industry is highly competitive, as demand is driven by things like consumer tastes and disposable income. While it seems like Monster has cracked the code on consumer tastes, and often develop new flavors, Monster might need to lower prices to compete if disposable income drops in the United States (accounts for 63,6 % of sales). Lower prices mean lower margins, which results in less profit.
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 Q1 2022 compared to Q2 2021, however they did mention in their conference call that they remain optimistic about the prospects of for the Monster brand in China going forward. Entering the alcoholic beverage market. Earlier in 2022, Monster acquired CANarchy Craft Brewery Collective in a $330 million deal. By acquiring CANarchy, Monster now has exposure to the craft beer market that is expected to grow by a 10,8 % CAGR according to Fortune Business Insights until 2028 and the hard seltzer market that is expected to grow by a 22,9 % CAGR until 2030 according to GlobeNewswire. It not only diversifies their products into new markets, it could also be a growth catalyst moving forward. Winning market shares. Nielsen make a report on the energy beverage market every quarter, and the last quarter was good for Monster as the sale of their products were up by 8,6 % compared to 7,8 % of Red Bill and 0,4 % of Rockstar, which are their two largest competitors. Monster also gained market shares in several European, Latin American, and Asian countries. Hence, their 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 at 2.57 (which is how it ended in 2021). I chose an Estimated future EPS growth rate of 11 (Which is slightly lower than the analysist consensus of 12,7 %), 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 $39,68, 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 $19,84 (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 1.156,741. The Capital Expenditures was 57,543. 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 40,217 in our further calculations. The Tax Provision was 423,944. We have 528,763 outstanding shares. Hence, the calculation will be like this: (1.156,741- 40,217 + 423,944) / 528,763 x 10 = $29,13 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 2,36 and a growth rate of 11 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $33,61
I believe that Monster is a great company, which a large 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 both in their core sector but also due to their new acquisition. 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 in the next few years. 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, so I won't be able to get it at a 50 % discount. However, 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". I will add Monster to the portfolio if it drops below $50.
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