Hansen Natural to Double in '08?

A good portion of you know that this past February, Hansen Natural (HANS) signed two distribution deals - one with Anheuser-Busch (BUD) in the U.S. and the other with PepsiCo (PEP) Canada. This means that Hansen will get much better shelfing "treatment" here in the U.S. and this is the first time Hansen will enter Canada. International expansion is just getting started and it's with one of the strongest beverage/snack businesses in the world. They're in pretty good hands!

I think what a lot of people aren't sure about is when these deals will be in full play and actually beneficial to the company. I'm actually not sure how the PepsiCo deal has progressed (I will look into it), but the A-B deal will be in full play soon if it isn't already. With A-B heading Monster's distribution, we should see a spike in Monster's market share growth which should take a nice chunk out of Red Bull's position. We could very well see Monster snag the #1 spot in the energy drink category. If not this year, it should be very soon (I'd say within three years at the most).

Basically, 2008 holds a lot of promise for Hansen. New products will be released early this year and more products are already in development. Hansen has a boatload of cash (approximately $255 million with no long-term debt) that will provide a lot of cushion for the company to develop and expand new products. The Monster brand name will really be seeing a lot of expansion given the huge success of Java Monster. So, management isn't just sitting on its hand while all this cash comes in. The company's efficiency is greatly improving (margins continue to expand) and cash flow production is higher than its ever been. And this is with the company managing its own distribution and this is just everything in the U.S. Monster is still second behind Red Bull.

Very few people seem to realize that international expansion is just getting started and that the A-B deal will likely push Monster to the very top. Hansen will now have a great distribution network both here and in Canada, which will make the release of new products much more efficient and it will give the company a much better idea of where the demand is and for what. The distribution deals haven't really been beneficial to the company yet but if all goes as planned they will be this year.

Why am I bringing this up? In the most recent quarter Hansen grew earnings by more than 70%. Yowza! The stock still got hammered because analysts still don't believe in the company, but earnings, sales, and cash flow production are growing at monster rates (no pun intended, I swear). Don't forget that efficiency is improving. Yet with all this, the stock has a P/E of under 34. Remember that 2008 will likely see increased earnings growth, higher efficiency, and a lot of new products. A P/E of 34 is way, way, way too cheap for this. Hansen is growing at incredible rates and they still aren't close to reaching their full potential here in the U.S., not to mention that they're just getting started in Canada. Hansen should easily be able to grow earnings by 50% in 2008. I think the P/E will definitely expand a bit once the market notices the company is doing better than ever. So, let's run some numbers:

The current EPS is $1.29. Let's start these numbers by assuming Hansen grows earnings 50% this year and finishes the year with a P/E of 40. The market expanded the P/E a little bit but didn't get any more excited than that.

1.29 * 1.5 * 40 = $77.40

With these pretty conservative estimates, the share price would expand 75% this year. That's with very little P/E expansion and a drop-off in earnings growth despite the two distribution deals becoming beneficial to the company.

Let's take it a step down and assume earnings grow only 45% this year and the P/E stays at 35.

1.29 * 1.45 * 35 = $65.47

That's a 50% increase from today's levels. And I'm not kidding when I say it wouldn't be that good of a year if this is what Hansen accomplishes. Seriously, the company is overflowing with cash and there is only more coming, and now they don't have to put nearly as much effort into distribution; instead it's in the hands of one of the beverage powerhouses of the world.

Let's now take it a step up and expect 55% earnings growth with a P/E of 45 slapped on.

1.29 * 1.55 * 45 = $89.98

More than a double from where we are today. And I really don't believe it's that far out to expect this. The bottom line is Hansen is in a great position and so far I'm convinced management is taking full advantage of it. Expanding the Monster brand name is very smart and should really pay off for the company. They're less and less relying on a single product for revenue but rather they're expanding their most popular brand name. It's a very smart way to go and it should really expand their customer (I've heard a lot of stories of people who don't like normal energy drinks but love Java Monster) reach.

So, what I'm getting at is Hansen really doesn't have to do that much for the stock to smash the market this year. The stock has been beat up after running up close to $70, and my conclusion is it's been overdone by a long shot. Stocks will always correct (especially when they're fast growers and have a high P/E), the question is whether or not it's over corrected. Nothing has changed for the worse with Hansen's business, and the future looks bright as ever. Hansen has registered for several trademarks/patents over the past several months for new Java Monster names, so management definitely is planning on continued expansion of the Monster name. Given the success of the original three Java Monsters, I can't wait to see what management's plans are.

Hansen is cheap, and I'm getting more and more tempted to add to my already large position. Hurco (HURC), Hansen, Buffalo Wild Wings (BWLD), Famous Dave's (DAVE), why do there have to be so many great opportunities, why?!? For now I'm probably going to wait another month or so and see if I can scrape together more cash. Restaurants probably won't be getting much love from the market so I'm not too worried about the stock prices spiking up anytime soon. But at this point waiting for earnings season may not be a bad idea.

Anyway, I just thought I'd put a little something together about Hansen. The company is fabulous, the stock is cheap. Can't put it much simpler than that. I strongly believe the stock will hit $70 this year and I wouldn't be surprised if we saw $90 by the end of the year. Unless management blows it and costs get out of control, earnings expansion this year is almost a sure thing. It will take time for the market to lighten back up to Hansen, sort of the same type of situation we had last year at this time (getting out of the options investigation), only there's nothing out of the ordinary.

So, get ready for another year of my Hansen cheerleading! I'll control myself as best I can.

Disclosure: Author has a long position in HANS

Comments

[DavidSchrader]

One thing you missed is that XS energy drinks hold the number two spot - but they're sold on a direct basis, not in stores.

[none]

Sounds like you are desperate pushing this stock. None of the insiders is buying at these prices