Shares of Monster Beverage Corp. (NASDAQ:MNST) have plummeted 36% from their 52-week high of $83.96 achieved in June. Previously, I have been very bearish on the stock due to its lofty valuations, which were difficult to justify even with the company's stronger financial fundamentals relative to its peers. As the stock dropped, and there has been no significant deterioration in the company's operations and financial performance over the period, the stock appears to be reasonably priced now. My updated view on MNST is based on the following four reasons:
1. MNST stock is very attractively priced relative to the firm's growth potential (see table below). Analysts in average forecast MNST's revenue, EBITDA, and EPS to grow by 2-year CAGRs of 21.0%, 25.1%, and 27.4%, respectively, over the current and next fiscal years. The growth rates are significantly higher than the average estimates for the peer group consisting of MNST's competitors such as Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP). Accounting for MNST's earnings growth prospects, the stock is trading at 1.2x PEG. Despite staying above 1.0x, the firm's PEG level is substantially below the low end of the peer group range between 1.7x and 3.1x.
2. MNST stock is also reasonably valued relative to the firm's overall financial performance (see table above). In addition to the robust growth prospects, MNST also has a superior profitability. Except for the firm's LTM gross margin, which is basically in line with the peer average, MNST's all other margin and capital return measures are above the peer group averages. Moreover, the firm carries almost no debt, compared to the peer average debt to capitalization ratio of 52.1% and debt to EBITDA rate of 2.2x. In terms of liquidity, MNST has the highest LTM FCF margin. The firm also has a fortress balance sheet as reflected by the superior current and quick ratios.
Having gone through the plunge, the current stock price of $53.34 per share implies an average valuation premium of 27% over the peer-average NTM EV/EBITDA, NTM P/E, and LTM EV/FCF multiples (assuming the multiples are equally weighted in determining the stock value) (see table above). I believe that MNST should deserve this valuation gap, given the company's robust financials, solid share in the energy drink market, and rumor of being a takeover target.
3. Based on the latest financial information, MNST has a net cash position of $870 million, representing approximately 9.2% of the current market capitalization.
4. MNST's valuation is much cheaper today than what it was a year ago (see table below). The firm's revenue, EBITDA, and EPS growth estimates have improved decently from exactly a year before. The profitability performance is basically flat. Although both the current and quick ratios have decreased, the company's LTM FCF margin has increased to 14.9% from 13.3%. Amid the overall financial improvement, MNST's NTM EV/EBITDA, NTM P/E, and LTM EV/FCF multiples have compressed by 12.9% in average, and its PEG ratio also decreased largely by 25.1% from 1.6x to 1.2x over a year.
In conclusion, MNST stock's valuations have become much more reasonable. For a better margin of safety, I prefer a slightly lower valuation, and as such, I recommend establishing a long position on the stock through writing out-of-money options at a strike price below $50.
All charts are created by author and all financial data is sourced from Capital IQ and Morningstar.