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Summary

  • Coca-Cola purchased a 17% share in Monster Energy and a new partnership has been established between the companies.
  • The partnership provides Monster Energy with access to Coca-Cola's expansive distribution system.
  • Friday's 30% climb in Monster Energy's stock price is a gross overvaluation.

Current shareholders of Monster Energy (NASDAQ:MNST) have to be more than pleased as the stock gapped up more than 30% Friday. The action behind this reaction is the announcement of Coca-Cola Company (NYSE:KO) taking a 17% stake in MNST. This move is similar to when KO took a 16% stake in Keurig Green Mountain (NASDAQ:GMCR) earlier this year and GMCR responded with a nice pop. I understand that a partnership of any sort with KO warrants an increase in a company's valuation, but an immediate 30% increase in valuation in response to KO taking a 17% stake seems a bit ludicrous.

Let's take a step back and look at what MNST actually immediately gains through this new partnership. Firstly, KO will hand over its current energy drink brands (NOS, Full Throttle, Burn, Mother, Play and Power Play, and Relentless), and MNST will turn over its "non-energy" brands (Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade and Hansen's Juice Products) to KO. This should allow each company to concentrate on its respective strengths in the drink market. Secondly, MNST will gain access to KO's extensive distribution system; allowing them to expand their products into new markets. While both of these occurrences will have a positive effect on MNST's business, I believe the access to KO's distribution system is the real gain. NOS, KO's most successful energy drink offering, only held a 3.3% share of the market in 2013. If KO's energy portfolio were all that successful and growing on its own they would not have to go purchase a significant stake in MNST. Now the question is whether or not access to KO's distribution system justifies the 30% valuation jump it brought.

No doubt KO's massive distribution system will bring MNST's products to new markets (specifically China), but these are not untouched virgin markets. Specifically focusing on China, there are many players already with strong brand recognition (including Red Bull, MNST's biggest direct competitor). While being teamed up with KO will no doubt make market entry much smoother, this will most certainly be an uphill battle in the beginning. In order to establish brand loyalty MNST will have to mount a very aggressive marketing campaign which may cut into any initial growth the company would see from these new markets.

If this was a complete take over a 30% premium on the current price would make complete sense, but this is KO taking a minority stake and offering a partnership. So, one might expect this to be a slowly developing process not realizing its full potential for a few years. Which begs to question, how long will the market be willing to pay a premium on MNST for growth that may not be realized until a couple years from now?

To recap, KO purchased a minority stake in MNST and this will certainly have a positive impact on MNST's future. The event certainly justifies an uptick in MNST's valuation; however $93.49 is a monstrous over reaction to the news. I believe MNST will have trouble showing the growth numbers to justify this price level and the market will soon after correct its previous misjudgment. For those who owned the stock before the KO announcement now may be the time to cash in your chips. As for those considering purchasing MNST at this price, I do not see what could propel the stock price beyond its current value other than pure momentum.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Monster Energy: A Monstrously Overvalued Stock