Monster Beverage Company (NASDAQ:MNST) develops, markets, sells, and distributes alternative beverage category beverages in the US and internationally. MNST produces their beverages through two main segments. The Direct Store Delivery segment offers carbonated and non-carbonated energy drinks; dairy based coffee drinks, drinks containing nitrous oxide or electrolytes, and ready-to-drink iced teas. The Warehouse segment provides sodas, juice cocktails, energy drinks, organic products, powder drink mixes, prebiotic and probiotic digestive wellness ready to drink beverages, and coconut waters. MNST sells its products through a distributor network and directly to retailers. MNST distributes its products under multiple brands including: Monster Energy, Monster Rehab, Java Monster, Worx Energy, Hansens, Vidration, etc. MNST was formerly known as Hansen Natural Corporation and changed its name in January of 2012. MNST was founded in 1985 and is headquartered in Corona, California.
MNST is a beverage company that offers a wide range of carbonated and non-carbonated beverages domestically and internationally. Our price target analysis projects $79 as MNST's new price target with a Buy/Sell range from $62 to $87. Given MNST's current stock price around $57, we rate this company as a "Buy". Looking at the past fiscal year performance MNST maintained strong key ratios giving it a high valuation. MNST has a large amount of growth potential for 2013 and is predicted to outperform the market. One area MNST is anticipated to see lots of growth in is international markets. Overall we see MNST as a highly valued company that will continue to grow and maintain valuation in 2013.
MNST is currently valued with a 29.7 PE and a future PE of 20.6. Compared to the industry average, 18.9, MNST is overvalued. In its fourth quarter report MNST indicated that its gross sales for the quarter increased 16.6% YoY bringing them up to $545 million. For the full fiscal year net income increased 18.8% YoY to equal $340 million, or $1.86 per diluted share. There is evidence to believe MNST will be able to sustain this growth during the 2013 fiscal year.
Looking at MNST's key ratios like ROA, ROE, and ROIC when compared to market competitors will give us a good idea of this company's performance against the others. MNST reports ROA at 28.3%, ROE at 41.9%, and ROIC at 41.9%. PepsiCo (NYSE:PEP), one of MNST's market competitors, reported its ROA at 8.4%, its ROE at 28.7%, and its ROIC at 11.2%. Coca-Cola Company (NYSE:KO) reported ROA at 10.9%, ROE at 28.0%, and ROIC at 13.9%. MNST is the strongest company in this comparison, a factor that has contributed to its overvaluation.
MNST's decrease in PE from current to future indicates that the company is predicted to grow in the coming fiscal year. MNST is predicted to grow 12.2% this quarter, 15.3% next quarter, and for the whole fiscal year it is predicted to grow 21.5%. These growth percentages are larger than numbers predicted for the industry in general: 7% for this quarter, 13.5% for next quarter, and 20.1% for the full year. We believe that these numbers indicate that even though MNST is overvalued, its growth potential and opportunity will allow the company to maintain its high valuation, leading us to rate this company as a "Buy".
MNST is the second largest company in energy drinks behind the Red Bull name. Even though right now MNST is offering its products in international markets the company is not yet seeing huge returns. Here is where MNST finds most of its opportunity moving forward. Making returns internationally would bring MNST large increases in revenue. Right now international consumers are given two main choices for American brand name energy drinks: Red Bull and Monster. MNST is systematically being offered at a lower price, which will likely bring consumers to consider MNST over Red Bull. 2013 should be a big year for international sales revenue for MNST.
MNST is a large-scale beverage company that has a wide array of products offered to consumers under different brand names. The number and variety of beverages offered touches many different types of consumers and gives them different demographics to which they can market their products. MNST's markets their products through many different avenues including sponsorships through NASCAR drivers, X-Games athletes and musicians, as well as promotional tours to college campuses. Although MNST is a diversified company with a well-established network of marketing opportunities we believe this company has a fairly light economic moat with very little barriers to entry against competition.
Revenue and EPS Outlook
Our price target analysis analyses the projected growth over the next five years for this company and gives us an estimate for their stock price over the course of the current 2013 fiscal year. Reflected in our first table is the projected growth in operating income. From 2013 to 2014 we predict 12.1% growth. The following price target was configured through a 5-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices. We expect MNST's current EPS of 1.86 to increase to 2.26 by Q3 of 2013. MNST's market competitor KO is expected to increase during the same time period from their current 0.44 to 2.14. On the contrary PEP is predicted to increase from their current EPS of 1.12 to 4.39 during the same period. This increase in earnings reflects our predictions that MNST will see growth during the 2013 fiscal year.
Price Target Analysis
The following price target was configured through a 5-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices.
Here is how to calculate price targets using discounted cash flow analysis:
(all figures in millions)
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012).
WACC for MNST: 6.00%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. This number is calculated by taking the fifth year available cash flow and dividing by the cap rate, which is calculated by taking WACC and subtracting out residual growth rate. Residual growth rate is typically between 2-6%. 4% is average growth for industry. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. This is why higher growth companies tend to have higher PE ratios. We will give you cap rate.
Cap Rate for MNST: 2.00%
Available Cash Flow
Divided by Cap Rate
Multiply by 2016 PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding:
Profit/Value Industry Comparisons
Q1 - Q3 2011
Return on Equity
Let's look at MNST's profitability margins and then compare them to market competitors. For the full fiscal year MNST saw a decrease from 26.8% to 26.7%, their gross margin decreased from 52.5% to 51.7%, and their ROE increased from 31.7% to 41.9%. During the same period PEP's operating margin decreased from 14.5% to 13.9%, their gross margin decreased from 52.5% to 52.2%, and their ROE decreased from 30.7% to 28.7%. KO increased their operating margin from 21.8% to 22.4% 2011 to 2012. Dr. Pepper Snapple (NYSE:DPS) increased their operating margin from 17.3% to 18.2%, their gross margin from 57.9% to 58.3%, and their ROE from 25.7% to 27.7% YoY. Lastly Anheuser-Busch Inbred SA/NV (NYSE:BUD) increased their operating margin from 31.6% to 32.0%, their gross margin from 57.4% to 58.6%, and their ROE from 16.1% to 18.4% YoY. When compared to companies in the same sector we see that MNST has very strong profitability margins and is a strong competitor in the market.
As we saw briefly earlier MNST's current PE is higher than the industry average, and their future PE at 20.6 projects growth in revenues for the coming year. Let's compare these figures to competitors. PEP's PE is at 20.7 with a future PE of 17.0. DPS's PE is at 15.9 and their future PE is 14.2. BUD's PE is 21.9 and their future PE is 17.9. KO has a current PE of 20.0 and their future PE is 18.2. MNST follows the market trend which projects growth across the board but for both PE and future PE MNST is the highest valued company.
What could go wrong in our argument? It is possible that MNST does not see growth domestically and abroad. MNST's valuation hinges on its predicted growth in 2013. Without any increases in revenues MNST would not be able to maintain its profitability margins or hit its projected metrics and its valuation would fall. Without the growth we have anticipated, especially in international markets MNST would not be able to outperform the market as anticipated. There is also a possibility that MNST would only see modest increases in revenue and would not be able to hit the 20.1% projected growth. In this case the company would lower in valuation and shareholders would see more modest returns as well.
The Bottom Line
After this full analysis we see MNST as a company that is valued very high with the potential to maintain that high valuation over the course of the 2013 fiscal year. There is a large amount of opportunity for increased revenues in the international markets, and it is anticipated that 2013 will be the year MNST will see large returns in these areas. This company has a large marketing presence to encourage growth of its multiple brands. MNST has strong profitability margins that are among the strongest in a market comparison. MNST's high valuation and large growth potential create a combination that projects a strong 2013 for this company and merits our "Buy" rating.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.