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Fomento Económico Mexicano (FMX) and Monster Beverage Corporation (MNST) operate in the non-alcoholic beverage industry. Each of these firms has amazing growth prospects. However, they are absolutely terrible investment at current price levels. Their high valuations should dissuade investors from buying at current prices until their high valuations descend closer to those of their peers.

Math > Glamour

Conceptually, I love compelling growth stories. However, stock investors should not buy a stock because the company is disruptive or a game-changer. Investors should be focused on growing the value of their assets, AKA making money. Stories, drama, the next big thing, and other distractors cannot justify paying one dollar for fifty cents.

Instead, investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. FMX and MNST represent the other extreme: these are great companies trading at overly enthusiastic valuations which should be avoided. Their metrics follow:

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

Fomento Econ

224.3

14.1%

12.5

22.0%

Monster Beverage

44.7

14.5%

7.2

23.0%

PEP

Pepsico

17.5

6.3%

1.6

13.6%

ABV

AMBEV

26.3

6.7%

8.4

9.0%

DPS

Dr Pepper Snapple

16.2

6.8%

1.6

4.7%

KO

Coca-Cola

20.5

7.9%

3.7

14.1%

KOF

Coca-Cola FEMSA

28.2

13.0%

2.5

14.3%

The valuation multiples of a company can be modeled over time by utilizing expected growth and trailing valuation multiples for FMX, MNST, and peer companies. Graphs of future price-to-earnings and price-to-sales ratios based on analyst growth estimates follow:

PE Beverage Companies
(Click to enlarge)

PS Beverage Companies
(Click to enlarge)

These projections illustrate the absurdity of current valuations for FMX and MNST. Shares of FMX do not reach comparable P/E ratios with other firms in a 25 year window, and only manage to outpace AMBEV within 10 years. MNST shares fare better, beating AMBEV's forward P/E ratio by 2018 and its P/S ratio by 2014.

Since MNST's future value multiples converge with competitors on a less ridiculous time-frame, estimated years of convergence were calculated below for this stock:

MNST Competitor

P/E Equivalence

P/S Equivalence

Pepsico

2023

2029

AMBEV

2018

N/A

Dr Pepper Snapple

2025

2020

Coca-Cola

2024

2019

Coca-Cola FEMSA

2046

2025

These dates span well into the future, demonstrating how MNST shares are overpriced. Even assuming that long term analyst growth rates will continue indefinitely (which is itself ridiculous) it would take over a decade of this phenomenal, uninterrupted earnings growth for Monster's current valuation to be equivalent to that of Coca-Cola or Pepsi.

Investors should avoid FMX and MNST at current prices. Instead, they should consider other companies on this list as more reasonable alternatives which can be justified without the absurdity of multiple decades of sustained, phenomenal growth.

Please read the article disclaimer.

Source: 2 Beverage Companies With Tummy Ache Valuations