A prior article of mine noted how Monster Beverage (MNST) was trading at much higher valuation ratios than its peers. The article demonstrated that ridiculous extrapolation of growth rates would be needed to somehow justify those multiples.
Since that article was published, the stock has fallen from grace based on recent financial results and legal issues hitting the news. How do the firm's valuations stack up now?
Bad News for Monster
Monster Beverage fell sharply by 11% to a 52-week low after announcing disappointing third-quarter numbers. Third-quarter income did increase by 4.6% to $86.1 million, up from $82.6 million last year, but the sales increase of 14% was less than the market estimate of $578.4 million. This was the slowest revenue growth for the company since 2010.
One of the reasons for the fall in revenue is the severe scrutiny Monster is facing because five people died after drinking Monster energy drinks over the past year. The investigations conducted by the U.S. Food and Drug Administration have exonerated the company; no link was found between the deaths and the beverage consumption. CEO Rodney Sacks has also gone on record to state that there is no evidence connecting the beverages to the deaths, saying, "There is not a shred of information of which causally links Monster to these adverse events."
Democratic Senators Richard Durbin of Illinois and Richard Blumenthal of Connecticut called for the FDA to clarify whether energy drinks qualify as dietary supplements.
Is It a Buy Yet?
Bad news is not enough; prices have to fall in order to make a firm substantially cheaper than its peers. The financial metrics of beverage firms are as follows:
Earnings Growth Est.
Historical Sales Growth
Dr Pepper Snapple Group
The valuation multiples of the company can be modeled over time by utilizing expected growth and trailing valuation multiples for MNST and its peer companies. Below are graphs of future price-to-earnings and price-to-sales ratios based on analyst growth estimates:
Click to enlarge images.
These projections illustrate that Monster is really in the middle of the pack. It has higher growth expectations for earnings and higher historical sales growth rates than most, and its price multiples are about in the middle of the pack.
The convergence of Monster's price multiples are calculated below for this stock:
Dr Pepper Snapple
Some of these dates span well into the future, while Monster is dominant to many other firms that have no future crossover date. This demonstrates how Monster is in the middle of the pack.
MNST shares no longer trade at ridiculously high valuations relative to peers. However, Monster is not compelling at current prices. As an alternative, investors should consider Dr. Pepper Snapple Group since it would remain cheaper for at least five years, longer than the validity of growth trends.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.