Hansen Natural: Buy and Holzer?

Law firm Holzer Holzer & Fistel is investigating possible violations of federal securities laws by Hansen Natural Corporation (HANS). From Marketwatch (emphasis added):

The investigation focuses on whether Hansen issued false and misleading public statements concerning the Company’s financial condition resulting in the Company’s stock trading at artificially high prices. The investigation seeks to determine whether Hansen violated the Securities Exchange Act of 1934 when it failed to disclose that sales of its Monster Energy Drink line were declining and that the Company was unable to control costs.

Shareholders of Hansen common stock who purchased shares between May 23, 2007 and November 8, 2007 with questions concerning their legal rights are encouraged to contact Holzer Holzer & Fistel.

So let’s look at what keeps Holzer & Co up at night:

• “Artificially high prices”
• “Sales in Monster Energy Drink line were declining”
• “Unable to control costs”

“Artificially high prices”

Note that the piece addresses investors who bought between May 23rd, 2007 (no special HANS day) and November 8th. The word “between” would leave out those who bought on November 8th itself, not coincidentally the day of HANS' Q3 earnings release and the day the stock took a haircut. Let’s see what kind of prices we’re talking about:

• May 23rd 2007 – HANS closes at $40.44
• October 18th 2007 – HANS tops at $68.40
• November 7th 2007 – HANS closes at $56.67
• November 8th 2007 – HANS closes at $43.50

click to enlarge images

At least I am glad I am not in the person’s shoes who has to argue the “artificially high prices” case:

• The price range is quite wide from $40.44 to $68.40 in just under 6 months. So is $45 already artificially high? Or is it $54.42, a simple average of the two?
• As recently as August 11th 2008, Westwood put a $56 price target on HANS. In June 2008, UBS still had a target of $53. And decreased it in a month to $48 and eventually $37, gradually - but not unnoticed - creeping to its peers. Claiming prices to be artificially high also implies that there is a “right price”… I am really curious what it is… If Holzer Holzer & Fistel know, they should close shop today, move to Greenwich, CT and set up a hedge fund.

The discussion about what’s cheap and what’s dear is as old as the markets, and I’d be surprised to see it settled in court.

“Sales in Monster Energy Drink line were declining”

First of all: sales in Monster Energy Drink line didn’t decline, sales growth declined. Which is a natural part of a product’s life cycle. It’s Business 101, and a waste of tuition if those basics didn’t stick.

Let’s look at some public statements from HANS management during the period that’s under scrutiny (most conference call transcripts can be found here):

Q1 2007 conference call:

…In that regard, the April numbers for Monster are up about 68%, just short of 70, so you can see Monster seems to have been – again, we are seeing an upward trend in the Monster sales in April. Although it is one month, and I do caution that, but nevertheless, we are believing that – we do believe that we are going to see some increases…

This is a remark on Monster sales for the first month of Q2 2007. Eventual sales growth (for the whole company, not just Monster) came in at 56% for Q2 2007.

Q2 2007 conference call:

…Going forward sales going into July sales are up in July 43.6% in the company. Sales of Monster are up well over 50% …

This is a remark on company sales and Monster sales for the first month of Q3 2007. Eventual sales growth (for the whole company, not just Monster) came in at 38.4% for Q3 2007.

Q3 2007 conference call:

… Overall we increased our regular Monster as a brand by about 16%…

Q4 2007 conference call:

Sales for January and February are up about 33% on last year…

This is a remark on Monster sales for the first two months of Q1 2008. Eventual sales growth (for the whole company, not just Monster) came in at 27.9% for Q3 2007.

I’m curious to know at what point Hansen Natural’s management had to foresee and failed to disclose negative trends in Monster sales growth beyond the normal product life cycle and business cycle dynamics.

“Unable to control costs”

The table below shows net sales growth and margin development for Hansen Natural for the latest 6 quarters. What Holzer & Co. exactly aim at concerning cost controls kinda escapes me.

Overview of sales growth and margin development in the latest six quarters.

A couple of notes: Q1 2007 and Q2 2008 operating and net margins are normalized, excluding several costs associated with the Anheuser Busch (BUD) distribution transfer, legal costs of option investigation and leakage damage (Q1 2007). Q4 2007 net margin is normalized using a 38% tax rate( instead of the 33.3% tax rate for that particular quarter).

Increases in commodity prices, generally out of management control, did have an impact on margins, but have been mitigated by raising prices of Monster Energy 16 oz and Monster Java. The introduction of Monster Java in Q1 2007 had an impact on margins as it has more expensive ingredients. Something that was clear from the beginning, and was the consequence of a strategic management decision to launch this particular product. Operating margin in Q1 2008 was at least partially impacted by start-up expenses in the United Kingdom without offsetting sales at that time, again a consequence of a strategic management decision and nothing out of the normal course of business.

Promotional allowances (costs associated with point-of –sales expenditures, promotions) have ranged between 11% and 13% for the last two years, not indicative of outrageous spending in order to beef up sales or anything.

And referring to a previous post, where are these out of control costs, Holzer & Co? Or are you referring to the future legal costs Hansen Natural has to incur to defend itself against these accusations? Sounds like some new sort of time-warp litigation…

Look, I (long shares Hansen Natural) - just like you - am all for full disclosure, transparency and frivolous lawsuits (aren’t we all): just wondering - who initiated or ordered this investigation?

Disclosure: Author holds shares of HANS

Comments

[John C. Lee:]

pullback is on nice, low volume. I would buy on a breakout at this point.

2008 Aug 29 04:14 AM

[Vzal:]

Who initiated or ordered this lawsuit? - you asked.
Lawyers, lawyers - the same ones who invented the copper wire fighting for a penny. Just wait and see how they will choke us after getting White House and overpopulating the Congress.

2008 Aug 29 02:08 PM

[captainccs:]

Lawyers make a living chasing ambulances and if there are none, they invent them. The sad part of these class actions suits is that it's shareholder vs. shareholder with the benefits going to the lawyers.

If you don't like the company, sell the shares but never sue yourself!

2008 Aug 30 12:25 PM

[b morphew:]

they haven't even announced a lawsuit yet, only an investigation, bizarre that they can even issue a public statement like that about a investigation and not a actual lawsuit. if you ask me this press release could have a significant impact on the stock price... do you think we can sue them, since they are not a legitimate news source?

regardless, outside of the united states, most countries have very strict laws regarding frivolous lawsuits and if you are found to bring one you are responsible for the defendants legal fees as well as running the risk of losing your credentials.

regarding making this a political issue speaking about the whitehouse, not really sure how that is relevant. do you think the drop in the market over the last year has anything to do with the confidence the country has in the current administration? or the fact that politically our country has lacked any clear direction or leadership over the last few years?

2008 Sep 04 09:22 AM