Yesterday Hansen was smacked down to $25, so I thought I'd take a look into it and see if there is good reason for the drop. The stock is at a new 52 week low and it actually hasn't been at these levels since 2006. I already own a bundle of Hansen stock, but an opportunity is an opportunity and I'm willing to increase my position if one is presented.
First, let's do a quick summary of the company's 1Q 2008 results. Net sales increased 27.9% to $212.2 million, net income increased 42.6% to $28.8 million ($0.29 per share) from $20.2 million ($0.21 per share) in 1Q 2007. The Monster brand remains strong and the new drinks in the Monster and Java Monster lines are proceeding as planned. Plans to expand the Monster line into the U.K. are going along as expected.$159.11 million in cash with no debt. One thing that isn't pleasing to see is that cash flow decreased to $25.93 million from $48.03 million in 1Q 2007. In the 10-Q, the decrease is explained a bit more:
For the three-months ended March 31, 2008, cash provided by operating activities was reduced due to a $11.6 million increase in inventories, a $3.8 million increase in prepaid expenses and other current assets, a $3.1 million decrease in accrued compensation and a $1.0 million increase in tax benefit from exercise of stock options. The increase in inventory is attributable to the addition of new copackers, the introduction of new products and planned inventory levels to meet consumer demand.
So the decrease in cash flow generally seems to be due to increased levels of inventory no doubt to meet summer demand and because of the new drinks just released six or so months ago. So the cash flow production decrease seems to be more of a short-term happening rather than a longer-term trend. It's also important to remember that this is typically a relatively slow quarter for the cold beverage industry yet the profit margin still managed to increase. The company's efficiency is excellent and I don't see the decrease in cash flow production as anything much more than a short-term item necessary for a strong summer. Of course, any thoughts on this are appreciated. But given the strong earnings and sales growth, superb balance sheet, and increased efficiency, the cash flow decrease just doesn't add up to me as anything representing a faulty business or anything like that.
The company's energy drink sales increased roughly 32% and remains by far the largest segment of sales. The energy drink portion of the beverage market continues to be one of the stronger areas and I highly doubt it will slow down much through summer. Monster is an addictive, hip brand with a diversified line of drinks, and with the distribution agreement with Anheuser-Busch (BUD) it certainly seems to be in a strong position. Plus, expansion into Canada and the U.K. is just starting and should start to become a more prominent part of the business.
Hansen has managed to increase the profit margin in the past couple quarters (especially in the 4Q 2007) which is impressive considering the new line of drinks and the still new distribution agreements (which actually good be a big part of the reason for increased efficiency). The balance sheet remains sparkling clean and earnings and sales continue to increase at impressive rates especially considering that the 1Q typically is a weaker quarter for the company. The one question market is cash flow, but the 4Q was such a strong quarter for cash flow production that I simply do not believe the drop off in the 1Q is much more than a short-term happening or a necessary evil to gear up for the summer.
In short, this is the way I see it. Nothing at all has dramatically changed with the business. The financials remain very strong, the new products are being well received, international expansion is just getting started, and nothing has changed with the company's long-term picture.
I look at it this way. From today's EPS of $1.60, let's assume that earnings grow at 25% annually for the next two years. This would put the EPS at $2.50 in mid-2010. This is more or less what analysts expect (analysts are expecting the EPS to be at $2.34 in fiscal 2009). Now let's assume that the market prices the stock with a P/E of 16, around today's range. Keep in mind that this is the P/E after the stock has been hammered on no news whatsoever. In any case, this would put the stock at $40, which would equal a 25% annual return over the next two years. These are extremely conservative projections in my opinion, for the next couple years I believe Hansen could easily increase earnings at 30%-35% annually. Most of the company's growth is coming from inside the U.S. on a still new distribution deal with Anheuser-Busch. Internationally there is a great deal of potential for the company and domestically there certainly isn't a shortage of potential with the new Java Monster line.
In the past couple of years, Hansen has typically bottomed out sometime in July. I'm very tempted to add to my position soon because there is no substance at all for the huge drop recently and today. As I write this the P/E is 15.83. This is the lowest P/E the stock has traded at since late 2003. I am not kidding, folks. Look at the company's YOY growth since the 2Q 2007:
Quarter Earnings growth [YOY] Profit Margin ------------------------------------------------------------------- 2Q 2007 35.9% 15.65% 3Q 2007 73.1% 18.53% 4Q 2007 103.1% 18.29% 1Q 2007 42.6% 13.58%
This amazing growth in a sluggish economy, and you give the company a P/E of 16? This is not right. Looks like Hansen will be a larger percentage of my portfolio soon.
Disclosure: Author holds a long position in HANS