Hansen Narrowly Misses Estimates, But Earnings Are Far From Failure

Yesterday, Hansen (HANS) reported its 2Q 2008 results (see conference call transcript).

• Gross sales up 15.5% to $324.1 million from $280.6 million in 2Q 2007
• Net sales up 15.3% to $282.2 million from $244.8 million in 2Q 2007
• Monster and Java Monster sales up 22.3% from 2Q 2007
• Case sales up to 28.72 million from 26.95 million in 2Q 2007
• International sales up to $19.5 million ($1.9 million in the U.K.) from $13.4 million in 2Q 2007
• Gross profit margin 51.8% from 52.4% in 2Q 2007
• Cost of sales $136.03 million from $116.51 million in 2Q 2007
• Operating income margin 27.7% from 25.1% in 2Q 2007
• Net income up 31.1% to $50.2 million ($0.51 per share) from $38.3 million ($0.39 per share) in 2Q 2007
• Profit margin 17.8% from 15.7% in 2Q 2007
• Company purchased 1.7 million shares in quarter at average price of $29.46 per share (total share count numbers not provided in press release)
• Cash and short-term investments $205.02 million

Analysts were on average expecting an EPS of $0.52 with sales of $314.08 million. Hansen narrowly missed estimates, but this was far from a disappointing quarter.

Considering how much the market has punished Hansen on speculation and fear only, this was a tremendous quarter. The profit margin increased yet again showing that this is a much stronger business than people have been crediting management for. The Monster brand has a very loyal following and the brand's strong performance this quarter only reiterates that. Monster is quickly gaining market share and management has been able to raise prices to offset higher costs. The Monster line is becoming very diversified in an intelligent way and I believe it will serve as all the more force to take over Red Bull's number one position over the energy drink market. The performance of Monster in this environment certainly makes me feel even more confident that it is not a fad as many have worried.

It's good to see that management bought back a good amount of shares over the past quarter, it would be an odd thing to see that they hadn't bought some shares with the very low valuation the stock.

For investors it certainly isn't a bad thing either, because it means that management is confident enough in these low levels to buy the stock, and the balance sheet remains in extremely solid shape. Earnings did not growing at an eye opening pace, but when you take into account the status of the economy and especially the beverage industry, the fact that Hansen managed to expand both earnings and margins while keeping the balance sheet intact is simply amazing.

No doubt the media will hype this up as a failure of a quarter since the company missed estimates slightly and gross margins fell a tad. The top line is important for sure, but it is silly to criticize falling gross margins when both operating and net income margins are increasing at very respectable rates.

Like I've said before, Hansen is not a darling of Wall Street anymore and Mr. Market has been extremely pessimistic with the stock. My feeling is that this quarter was good enough that the downside is pretty limited from here on out from today's stock price. Monster remains an incredibly strong and profitable brand with increasing market share, margins continue to increase, the balance sheet remains in fabulous shape, and international sales are starting to pick up.

I have been buying more Hansen shares like crazy (at least for me) and I remain very confident in the company's future. Sure, growth is slower than it has been for awhile, but the economy is not in the best of shape right now either.

Hansen has two great distribution deals still picking up and internationally the company has huge opportunity. For the next 5 years and beyond, I am confident that Hansen will easily and handily beat the market. With the EPS now at $1.72, the P/E sits at less than 13. This is less than Coca-Cola (KO), PepsiCo (PEP), and the beverage industry as a whole. The stock is cheap and deserves a far higher valuation, making me all the more comfortable and confident with my most recent investments into the company.

For the 3Q 2008, analysts are on average expecting an EPS of $0.57 on sales of $317.31 million.

Disclosure: Author holds a long position in HANS

Comments

[User 183867:]

I agree the company is undervalued and this quarter was fine, but disagree with your read on margins. Adjusting for some chunky corporate expenses in Q2 last year, operating expenses were up 22% on 15% revenue growth. With gross margin down, EBIT margin contracted by 200 bps, to a still quite-attractive 27.6%. What's most interesting is operating expenses per case, adjusting again for corporate items last year, were up 15%. Ex G&A, I would bet marketing was up even more per case. The company isn't making its numbers by stinting on marketing support and product innovation and they're not goosing volume by increasing trade promotion per case. That's the bullish takeaway here.

2008 Aug 08 08:17 AM

[Mr. EB_:]

The Goldman analyst and even management was confused on the conference call on sales trends of good in April, horrible in May, getting better in June and getting even better to 20% growth in July.

I can't believe these guys can't use their brain. 75% of their energy drink sales are at gas stations and convenience stores. Oil spiked to $145 during that time frame, so obviously gas stations and consumer reacted. However in recent weeks, oil has been plummeting by over 20% in recent weeks from $145 to $117 this morning. This obviously explains the business sales trends of Monster getting better.

This also means August much be getting even better than July for Hansen as oil has fallen like a rock in August.

Now you have a company with sales trends getting better, 9x EPS ex-cash at 20% growth, a great brand, and 39% the float short with a stock price down over 40% in a matter of weeks. Sounds interesting to me.

2008 Aug 08 09:15 AM

[Duude:]

Lets see now, Coca Cola has a forward PE of 16.08 and a PEG of 1.85 and 1.4% of the shares short while Hansen has a forward PE of 9.78 and a PEG of 0.62. and 38% of the shares short. Sounds about right.

2008 Aug 08 10:04 AM

[DEE KAY:]

I don't understand all of the lingo.

Are you saying BUY or SELL??

2008 Aug 08 08:07 PM

[avcacio:]

DEE KAY - All he is really saying is ..... Duuuude - which is supposed to be "cool" for the brainless group

2008 Aug 10 05:51 PM