Monster Beverage Is A Good Company, But It's Pricey

Summary

• 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.

Coca-Cola's blessing

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

Concluding remarks

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.

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.

Comments

[TheBullGuy]

I like the stock, but I don't think it will be the next Coca Cola as most people claim it to be. For reason that is I can drink Coke at anytime of the day but not Monster and also people usually don't consume energy drink with their meals. Further more, the stock has double since last year. That is a very fast pace for a beverage company so buying it now would be very risky.

[William Bias]

I agree TheBullGuy.

Thanks for reading,

William

[ltira2]

this looks like a short to me. Any misstep and the valuation will have to adjust. Secular trends (health-conscious consumers) also working against the company in the long run, despite its growth for the past few years.

[mane]

150septcalls I entered @1.90 now just playing with house's money. I wouldn't own the equity but the options are climbing towards earnings. Actually, I wouldn't own any stocks.

[semi-retired]

Great analysis! COKE does seems to be delivering on expanded US access in places like McDonald's that Coke services. A couple days ago off of I-71 near Cleveland there were large counter signs with pictures of 2 Monster cans offering 2 cans for $4.00 or 1 for $2.29. The trucker in front of me got 2 with his meal to go.

[William Bias]

Hi semi-retired,

Thanks for reading.

William

[bently]

Good title: ... Good Company but Pricey. I take that as a signal to stay away as opportunity cost can be significant.

[WEareBELGIUM]

people said the same thing when it traded around 50USD.

in the mean time, it tripled.

sure stay on the side line. No one is going to push you to succeed.

[WEareBELGIUM]

Sorry to be straightforward but your article does not argue whatsoever the title you chose.

If you take the market as whole, the NASDAQ, at least MNST even if it jumped at least 1000% over the last decade still has a decent P/E.

Lots of tech indebted (à la USA) making nonprofits : they dont have any as it is impossible to assess.

SO yes, like any other of million of securities trading on planet earth, the stock is pricey.

But when KO reports came out 2 days ago, it highlighted the benefit (one time item + acceleration of the distribution partneship) after only a few weeks into the agreement.

Yet MNST will be the biggest beneficiary from this deal.

That will drive growth, reduce P/E and grow the cash pile.

Where is the problem?

It has been 3 years now that all the FDA/death related came out.

If more people over the last 3 years drank MNST products (more than ever) and no more death have been supposedly linked to it, i guess there is not much left to worry about.

Maybe the FDA will come out with some sort of note but if it does, i am sure it will impact the whole soda category.