Hansen Natural: Q1 Results Better Than They Appear

| About: Monster Beverage (MNST)

Yesterday, Hansen Natural (HANS) filed its 1Q 2007 10Q.

  • Net income down to $20.2 million ($0.21 per share) from $21.09 million ($0.21 per share) in 1Q 2006 due to higher operating expenses
  • Diluted share count 98,301,000
  • Total cash $71.86 million
  • Only $300K in debt
  • Cash flow from operating activities $48.03 million from $23.79 million in 1Q 2006
  • Cash flow from investing activities -$11.1 million from -$56.01 million in 1Q 2006
  • Cash flow from financing activities -$211K from $1.12 million in 1Q 2006
  • At first glance, these are not good results at all. Income is slightly down, hardly something you'd expect from Hansen. But it's not completely fair to judge them right offhand without seeing why income is down. Operating expenses look a huge jump YOY, but this is partially because of the legal fees related to the stock option investigation, the termination of their past suppliers (which was paid for by Hansen's new suppliers, but they still must report it on the income statement). The legal fees and termination fees related to the investigation add up to $12.8 million. That's a pretty large chunk of the overall operating expenses, so things really weren't quite as bad as they look. Just look at how the business doubled the amount of cash produced. The business is very strong, but one-time expenses have made things look worse than they really are.

    Hansen is now in full compliance with the Nasdaq. No intentional misconduct was found, the unaccounted accounting errors found only add up to $1.3 million or so, and the company has now updated its accounting procedure to be sure they don't miss anything going forward. Hansen is securing the A-B and PepsiCo partnerships, has a very strong balance sheet, and is producing incredible cash flow.

    Since Herb Greenberg is already bashing the company for missing estimates without realizing there are considerable amounts of one-time expenses, let's look at this a bit. Total overall operating expenses were $53.73 million for the quarter. One-time expenses related to the investigation (that I know of, I may have missed some; but these for sure are one-time expenses) amount to $12.8 million. Without these one-time expenses, the EPS would have been in the $0.30 range, which is above what any analyst was expecting. So you realize that this was actually a very strong quarter. If the stock gets hit because of this, it will be an excellent opportunity to pick up shares, because net income is not faltering at all. Plus, the two distribution deals are more and more coming into play.

    I am more confident in Hansen than ever before. This was a very strong quarter, the new distribution deals will be starting to role this year, and new products are being rolled out. Management is clean, the option investigation is behind the company, no misconduct was found; things are good. I think the future is better than ever and that we'll see strong growth from the company from here on out. If the business is producing twice as much cash flow even amidst all the difficulties the company has had, you have yourself a strong business. Shareholders should be very pleased with the progress the company has made even with the investigation. The long-term future has never looked quite so good, in my opinion.

    Disclosure: The author has a long position in HANS.

    HANS 1-yr chart