Why Buying Monster Beverage Might Be A Monster Mistake

Aug.18.14 | About: Monster Beverage (MNST)


Monster agreed to sell a large piece of equity to Coca-Cola for $2.15 billion and in exchange for an asset swap, sending shares up 30%.

This might remind investors of when Coca-Cola acquired 10% of Keurig Green Mountain, acting as a catalyst for the company's share price appreciation.

This might, however, be a mistake for investors to get their hearts set on. Right now, Monster is very expensive and, as such, may have limited upside moving forward.

August 15 was a great day to own shares of Monster Beverage (NASDAQ:MNST). By the time the market closed, shares of the energy drink sensation had risen 30% to $93.49 after touching a new all-time high. The reason the company's shares shot up? The Coca-Cola Company (NYSE:KO) announced that it agreed to acquire 16.7% of the beverage maker and both it and Monster decided to do an asset swap that could prove beneficial to both parties. While this may bring back fond memories of when Coca-Cola bought 10% of Keurig Green Mountain (NASDAQ:GMCR) for $1.25 billion, a company whose stock has soared 43% since the news broke, investors probably shouldn't expect the same kind of movement for Monster anytime soon.

Sweet deal for Monster's shareholders

According to the terms of the agreement between Coca-Cola and Monster, Coca-Cola will pay $2.15 billion for a 16.7% stake in a deal valuing Monster at $12.9 billion. In response to the news, the company's market cap skyrocketed to $15.6 billion from the $12 billion it was priced at a day earlier. Although the deal will dilute existing shareholders, the fact that Coca-Cola is in the mix suggests that Monster might be able to use the company's resources to grow even faster than it has in recent years.

Another key component of the deal is that Coca-Cola will transfer to Monster all of its energy drink operations, which consist of Full Throttle, NOS, etc… while Monster's non-energy drinks like Peace Tea and Hansen's Natural Sodas will be transferred over to Coca-Cola. Unfortunately, Coca-Cola does not provide detailed sales data on its energy drinks, but Monster does.

Monster's Segment Revenue
2013 2012 2011
DSD $2.15 billion $1.97 billion $1.61 billion
Warehouse $99.07 million $94.22 million $94.90 million
Click to enlarge

Between 2011 and 2013, while sales of Monster as a whole rose 32% from $1.70 billion to $2.25 billion, its Warehouse segment, which makes up all of its non-energy drinks (with the exception of its Peace Tea product line, which is in the company's DSD segment and for which no separate sales data exists publicly), saw sales inch up just 4% from $94.90 million to $99.07 million. From a profit standpoint, the situation was even worse, with the segment's contribution margin falling from a gain of $4.29 million in 2011 to a loss of $1.65 million in 2013 as higher promotional activity and rising costs ate away the segment's profit.

Monster's Contribution Margin
2013 2012 2011
DSD $726.83 million $660.61 million $543.21 million
Warehouse -$1.65 million $3.50 million $4.29 million
Click to enlarge

In addition to growing closer to Coca-Cola than the company already was and in addition to the hefty sum of cash it will have to invest in growth, Monster is ridding itself of underperforming products and will, hopefully, receive more profitable energy drinks from its partner. While these factors should likely be a boon for business, investors should be hesitant about buying into Monster at this stage because the company is, at the moment, quite pricey.


Using 2013's performance numbers, investors buying shares of Monster now will be paying 48 times earnings for the beverage giant. Even being more liberal and utilizing 2014's expected profits, shares of the energy drink company will come at a high price tag of 36 times earnings. Of course, faster growth could warrant a higher share price, but given the fact that revenue has increased at a cumulative 96% over the past five years while net income has lagged with a (still impressive) 62% improvement, it's unlikely that Monster's bottom line will expand rapidly anytime soon.

If investors are to assume that (including 2014 as the first year), Monster's earnings will grow at a cumulative 62% over the next five years, investors are still paying 28 times 2018's profits for its shares. While this isn't to say that Monster doesn't make for a good long-term play, it does imply that, at its current level, investors would be wise to be very cautious should they choose to invest. It is true that Keurig Green Mountain's shares continued to rise after Coca-Cola bought a stake in it, but even after soaring, the company's stock is still trading at a more modest (but still pricey) 30 times forward earnings.

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.