Monster Beverage Corporation (MNST) declares its fourth quarter and full year 2012 results today, February 27, 2013. The year gone by has been tough on the company and analysts expect earnings to be on the lower side as compared to the last quarter. Annual earnings per share however are expected to be a tad higher than the trailing twelve month EPS.
Monster Beverage Corporation is a holding company that operates under two segments. The principle products of the Direct Store Delivery segment are primary energy drinks. Products under the Warehouse segment consist of juice-based beverages and soda. In December 2011, MNST acquired assets of PRE Beverage including a line of prebiotic and probiotic digestive wellness ready-to-drink beverages and powder drink mixes, containing specially formulated blends by Jarrow Formulas.
This January, the company had to defend itself and its energy drinks when Substance Abuse and Mental Health Services Administration said in its report that emergency rooms visits involving energy drinks had more than doubled in four years, from 2007 to 2011. The report attempted to establish a connection between consumption of energy drinks and public health issues and risky behaviors. More recently, a member of the Cleveland Council introduced an ordinance seeking to make serving of energy drinks to anyone under the age of 18 a fourth degree misdemeanor. The moot point is that the caffeine in these drinks is too high - 70-80 mg per 8 ounces. Caffeine causes alertness and when mixed with alcohol the drink works to conceal the symptoms of intoxication.
Monster Beverage is valued by the market at $8.39 billion even though its enterprise value is a bit lower at $7.92 billion. The book value of its stock is $5.19 and the stock is currently trading at 9.56x book value. The company operates at a relatively higher (as compared to carbonated drinks) operating margin of 26.80% and return of equity at 36.94%, one of the highest in the industry.
Total revenue in FY 2011 was $1.70 billion, up 31% from 2011 revenue of $1.30 billion. Expenses registered a similar increase, resulting in net income of $286 million, an increase of almost 35%.
Monster Beverages competes with PepsiCo, Inc. (PEP) and Dr. Pepper Snapple Group Inc. (DPS). While Pepsi is a global food and beverages company, DPS is an integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States, Canada and Mexico.
Although all three companies belong to the same sector (consumer goods) and the same industry (soft drinks) energy drinks is not the major focus of either Pepsi or Pepper Snapple. In that sense its real competitors are privately held companies such as Red Bull GmbH, makers of an energy drink by that name and Hornell Brewing Co., Inc., makers of energy and sports drinks and iced tea and fruit drinks.
Pepsi owns a wide range of well known international brands in foods as well as beverages. Its products sell worldwide. Although valuation wise (market cap $116.67 billion) it is a much larger company, its operating margin of 14.36% is much lower than that of Monster Beverages.
Dr. Pepper Snapple Group is a dividend paying (dividend yield 3.55%) company with roughly the same valuation as that of MNST. It has a diverse portfolio of non-cola flavored carbonated soft drinks and non-carbonated beverages, including ready-to-drink teas, juices, juice drinks and mixers.
Stock Performance - What the Future Holds for MNST
Regulatory concerns over energy drinks have been a major concern and as a result the stock fell by almost 10% - down to $48.95 from $54.23 on January 02, 2013. The stock was however, trading at above $75 in mid-June 2012 and dropped to $41 by October end. The stock recovered and went up to $57 in mid December 2012.
Analysts expect the volatility to continue amidst rumors of possibility of a takeover by Cocoa Cola (KO). There were reports in The Wall Street Journal last year of a possible takeover. The rumors are surfacing again but this time, Coca Cola has not yet come up with an open denial. Coca Cola's interest in Monster is understandable as it will put it in an advantageous position over its archenemy, Pepsi.
Whereas Coca Cola has energy drinks such as Full Throttle, Burn and Gladiator, Pepsi has its AMP Energy. However, regardless of their large size and reach and huge marketing budgets, neither of the two have been able to match the success of Monster Beverages in the energy drink segment.
Monster's revenues have grown at an average annual rate of 24% over the last five years, which is way ahead of 15% and 14% growth in sales registered by Coca Cola and Pepsi respectively. More than anything else, this by itself should be enough reason for Coca Cola. However, much depends upon the price tag. Monster is currently valued at around $8.5 billion because of the downslide in share price over regulatory concerns. The actual price tag would be much higher, probably above $10 billion, which is nearly two and half times the largest brand purchase of vitamin drinks made by Coca Cola.
Goldman Sachs recently placed a two-year target of $90 for Monster Beverages.
The Down Side
Energy drinks is the fastest growing segment in soft drinks industry and the biggest challenge is from competitors. The biggest challenge, particularly for Monster Beverages is from natural beverages as they do not have regulatory issues.
Recently, Starbucks (SBUX) launched Starbucks Refreshers, an energy drink based on natural fruit juice and green coffee extracts. Pepsi has also launched Kickstart - although marketed as an energy drink, the company refuses to call it one. Kickstart contains 5% juice and vitamins B and C with caffeine added for that extra kick.
The Coca Cola deal may not happen in the near future but Monster's strong position in the market is undeniable. This needs to be read with the statement made by Wal-Mart (WMT) in its earnings call on February 21, 2013 that "sales from energy drinks continue to be strong" at its Sam's Club.
If the earnings report of February 27, 2013 (many readers would have probably seen it by the time this article is published) shows growth similar to prior years, there does not seem to be anything to stop Goldman Sachs' prediction from coming true.