- Monster Beverage’s stock has outperformed the market by a 5 to 1 margin in the past five years.
- Energy-hungry consumers drive Monster’s awesome expansion in fundamentals.
- Monster Beverage’s P/E ratio lies in the stratosphere.
Energy drink company Monster Beverage (NASDAQ: NASDAQ:MNST) has blown it out of the water on the fundamentals front, translating into superior returns for shareholders in the process. Over the past five years, Monster Beverage has expanded its revenue, net income and free cash flow 100%, 81% and 91%, respectively. This translated into a total return of 592% for Monster vs. 114% for the S&P 500 as a whole (see charts below). Here's why I think this company will continue to expand fundamentally, but at some risk to investors.
MNST Revenue (TTM) data by YCharts
MNST Total Return Price data by YCharts
Demand and expansion
Demand represents the greatest driver of Monster Beverage's fundamentals over the past five years. People love the stuff. We live in a society where everyone moves as fast as they can. Youthful consumers driven to study and play hard, seek the extra jolt to keep them on the move. Middle age office workers drink it to help them stay on task. Moreover, there is probably an appealing element underlying the caffeine/sugar mix found in the drinks.
Monster Beverage also performs better than rivals. According to Beverage-Digest, Monster Beverage saw an overall volume increase of 7% in 2014 vs. 5.6% for its rival Red Bull. Monster Beverage ranked No. 6 when ranked by carbonated soda volume, also exceeding rival Red Bull, which came in at No. 7. Monster Beverage, seeing its success on the demand front, expands aggressively and is constantly dreaming up new products to keep customers interested and coming back for more.
Another driver for Monster Beverage's success stems from Coca-Cola's (NYSE: KO) investment in the company. Coca-Cola purchased 16.7% of Monster Beverage giving the target company a $2.1 billion cash infusion, according to Bevindustry.com. This gives Monster Beverage expanded distribution of its products via greater access to Coca-Cola's vast distribution infrastructure. The move did nothing but improve Monster Beverage's perception on Wall Street, contributing to the skyrocketing stock price highlighted above.
Extreme market price risk
The recipe combo of high demand, interesting new products, and expansion kept Monster Beverage's P/E ratio consistently high over the past five years. More recently, non-recurring expenses stemming from the termination of relationships with certain distributors from Coca-Cola's recent investment put a dent in Monster Beverage's net income. This drove Monster Beverage's P/E ratio to a new five-year high of 66 (see chart below). This compares poorly to the P/E ratio of 19 for the S&P 500 as a whole, based on data from Morningstar. This means any kind of disappointment on Wall Street, or some adverse macro-economic move such as a slight rise in interest rates, could send this stock plummeting.
MNST PE Ratio (TTM) data by YCharts
I believe Monster Beverage will continue to flourish fundamentally speaking. People looking for that extra energy jolt will continue to purchase its products. Expansion will certainly help drive Monster Beverage's fundamentals, especially as its relationship with Coca-Cola comes to fruition.
At the sky high P/E ratio of 66, I am a holder and not a buyer of the Monster Beverage stock. Wall Street analysts apparently agree with me on its prospects. Thomson/First Call has the analysts' mean target price pegged at $150.27, representing a mere 1% increase from its current stock price. Investors should wait for a correction before buying any shares.
This article was written by
Analyst’s Disclosure: I am/we are long MNST, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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