- MNST - Upgrade to Buy from Hold
- SAM - Maintain at Hold
New Price Target
Old Price Target
New Buy/Sell Range
We have bumped Monster Beverage to a Buy from Hold despite a price target drop. The company has become more attractive as a value play due to recent weakness. Additionally, we see Boston Beer as fairly valued at this point with limited upside for the rest of 2012.
Monster Beverage's stock has recently been hurt by the announcement of an investigation into the company's marketing practices of energy drinks by New York state. We believe the investigation is a short-term negative that will have little impact on the company and has been overdone. The energy drink market continues to grow and strengthen despite this investigation, and the company is about to launch a more global revenue stream that should benefit them greatly. Further, margins have been improving for MNST, which we believe is a great sign of the health of the company and will provide continued upside in earnings per share.
One of the best aspects of Monster is that the company has been domestic for most of their initial growth phase. The company is just starting to branch out into new markets. While no one can know how well their products will be received, energy drinks are popular in foreign markets as well. The sheer prospects of China, Japan, Europe, and South America as new markets for both energy drinks and Hansen sodas are very promising, and we believe that a lot of that value is being overshadowed by recent stock weakness and investigation. The company currently is operating a future PE for us at 22. While definitely above normal value, the company is also growing at a much larger rate than most companies. Yet, other companies growing at the same rate offer much higher future PEs, and we believe that a 25-30 future PE is more appropriate for this growth level.
Finally, another reason to like Monster is its appeal as a potential takeover candidate. A company with a growing brand name, no debt, and tons of cash is attractive. Valuations have come down significantly as well. Coca-Cola (KO) or Pepsico (PEP) would be wise to take a bid as their energy drinks continue to lag MNST, and they can easily mold the company into a global product with their experience at doing this.
Most of our drop in PT did not come from slashing our estimates for growth. Rather, we are seeing higher tax rates, increased expectations of capex above expectations, and slightly decreased expectations that may arise from the company's investigation. What we mean by that is the brand could lose some clients simply by way of negative headlines.
For Boston Beer, we also dropped our target here. This drop was more about actual business expectations diminishing for the company along with diminishing margins that are well below what was expected. The craft beer market has exploded in 2012, yet the entire beer market has diminished. Ciders and hard alcohols have been more popular, and while craft beer has become more popular, the pie has gotten smaller. Not to mention the fact that craft beer drinkers tend to enjoy many different brands and like trying new types/styles of beer. While Sam Adams leads the group and has found itself a great niche market, the company saw a 17% increase in marketing/sales expenses YoY while only seeing a 9.5% increase in revenue. Cost of goods also increased more than we expected for the company, squeezing operating margins from 20% to 12.5%. These trends are not conducive to higher valuations.
The company's drop in margins made us slash our estimates for the year and diminish our overall thesis, as it was one of the first signs that the company's niche economic moat is penetrable. Right now, the stock sits with a 23 future PE, larger than MNST. Yet, SAM is estimated to grow revenue in 2013 by 8-9%. MNST, on the other hand, should grow sales by 16-18%. SAM's ability to expand internationally is much more difficult than MNST as well. Beer markets are strong overseas with historical names and crowded markets. Energy drinks are much less crowded, and the market is still being established.
Overall, we see MNST as a nice buy right now on weakness that is short-term. SAM, on the other hand, seems to have a longer-term peak that may take more time to solve.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.