- After the bell this afternoon Coke announced it had taken a 16.7% stake in Monster Beverage.
- This move gives Coke an avenue of growth that it sorely needed.
- Coke doubles down on its recent successes within the 'alternative' beverage segment.
- M&A growth should help KO maintain its dividend growth into the future.
Being that Coke (NYSE:KO) is currently the largest position in my portfolio I've been worried a bit as what seems to be a long-term trend, falling sales and volume of the company's biggest products (carbonated, sugary beverages), rears its ugly head every quarter in the earnings reports. My main concern as a KO shareholder are the falling domestic volumes, where nearly half of the company's revenues are generated. KO has tried different measures to increase its sales, such as offering smaller units to those concerned with calorie intake or experimenting with different, possible more healthy sweeteners as ingredients, but it ultimately seems as though there is little growth left to tap in the domestic soda market. The company has been able to continue its global growth, though at a much slower pace than I'd like to see (3% last quarter). Because of these fears the stock has underperformed as of late and if it weren't for the incredible dividend history that this company has to offer I wonder how many investors would have jumped ship. Ample growth has been scarce for this beverage giant, which is why investors got excited when KO announced it raised its stake in Keurig Green Mountain (NASDAQ:GMCR) earlier this year. This move, alongside of the company's latest dividend increase, spurred the run up from $37 to $40, giving investors solace who own the stock with hopes of future growth through Coke's willingness to expand through M&A. This afternoon after the bell, I received more M&A excitement again when it was announced that Coke had taken a 16.7% stake in Monster Beverage (NASDAQ:MNST) for $2.15B.
What Monster offers Coke is immediate growth both domestically and internationally. Energy drinks and alternative beverages represent one of the few growth stories within the consumer staples market. U.S. Wholesale sales of alternative drinks, which include ready to drink iced teas, lemonades, coffees, and energy selections, increased roughly 5% in 2013 to an approximate $37.7B. This figure is expected to continue to climb as carbonated soda volumes decline. Coke has noticed this trend as well, with its still beverage segment outpacing its sparkling options significantly. At the end of Q2, KO's worldwide still segment was up 6% YTD while the sparking segment was up 1%. The company has recently made bets on new trends such as coconut water and water enhancers; this new stake in Monster continues this trend.
2013 was the 21st consecutive year that Monster recorded increasing gross sales. The company's 2013 gross sales ($2.59B) were up 9.3% from the 2012 figure. While MNST is experiencing high single digits growth in the United States as it maintains its status as top dog in the American energy drink market, the company is posting even better numbers internationally. 2013 international gross sales were $580.6M compared to $513.9M in 2012, and $380.0M in 2011. This represents a 26% annualized growth rate.
After posting strong double digit gross sales growth in 2011 and 2012 (31.0% and 21.7% respectively), the company's stagnated growth in 2013 is being attributed to the slow down of Monster Energy drink line. I think the timing of this move is great for both parties and I expect that with the added benefits that MNST will receive from KO's massive distribution and marketing network, growth will pack back up as the KO/MNST partnership focuses on taking share in the alternative beverage industry.
This partnership is ideal for both companies, allowing them to use their resources to form a symbiotic relationship. As a part of this deal, KO is transferring the ownership if its worldwide energy business, which includes its portfolio of energy drinks that have underperformed relatively to the market leaders, Monster and Red Bull. Monster is transferring its non-energy related business to Coke, which includes Hansens Natural Sodas, Huberts Lemonade and Hansens Juice Products, and a crowd favorite where I live, Peace Tea. I like this realignment of products, it should allow each company to focus on the types of businesses that they do best. Once the deal is complete, KO will also receive to slots in MNST's board of directors. While Monster is divesting several potential earnings drivers, it is gaining access to Coke's distribution network. I like the fact that Monster now represents a powerful energy beverage pure play. Concerning this, Hilton H. Scholsberg, Monster's Vice Chairman and President said, "Our agreement enables us to focus on our core energy business, while leveraging the strength of The Coca-Cola Companys powerful distribution and bottling system on a worldwide scale."
Coke's Chairman and CEO, Muhtar Kent had this to say about the deal, "Our equity investment in Monster is a capital efficient way to bolster our participation in the fast-growing and attractive global energy drinks category. This long-term partnership aligns us with a leading energy player globally, brings financial benefit to our Company and our bottling partners, and supports broader commercial strategies with our customers to bring total beverage growth opportunities that will also benefit our core business." It was also noted in the press release that KO hopes to that this relationship will continue to evolve, which causes me to believe that there is a good possibility of further ownership taken by KO in the future, similarly to how they've continued to buy shares of GMCR.
Not only does it seem that MNST will use this deal to refuel their growth, a statement made by Scholsberg suggest that investors in the company might expect a tangible growth of their pockets with the company's President mentioning that Monster plans "to review all options available to return a substantial amount of cash to our shareholders." And speaking of shareholder returns, I think KO shareholders should be excited too. The company needs earnings growth catalysts if its going to continue to increase its annual dividend in the high single digit range that investors are used to. At the end of the second quarter Coke's global volume was only up 2% while its operating income was down 2% YTD. The company has still been able to post positive EPS growth through pricing measures and improved margins but I'd rather rely on product volume and revenue growth for my dividend security.
(quote source: press release)
All in all, I am happy about this move. I think this is another example of Coke's wonderful management having the foresight to do what is right for the company and its shareholders in the long term. I expect growth to continue in alternative beverages as sodas being increasing taboo (although I think that its a bit ironic that many of these "alternative" options are just as sugary and caffeinated). Irony aside, I'm not going to fight the trend and it seems as though Coke isn't either. I've heard naysayers insist that KO is a dinosaur and they wouldn't be surprised to see it go extinct in their lifetime as consumers come around to the health food movement. My response has always been that Coke has so much market share in the worldwide beverage industry, they would have to be completely complacent to ever lose their standing as a major player. A move like this shows that being large in size doesn't prohibit one from being nimble. I expect to see this dinosaur continue to throw its weight around and make the moves necessary for it to remain competitive in the world's changing environments.