This Monster Breaks the Rules
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Motley Fool calls certain stocks Rule Breakers. A Rule Breaker can appear wildly overpriced using most valuation methods, but it may still outperform the market when several positive traits are present. Monster Energy (NASDAQ: MNST) seems like a Rule Breaker, and the company has proved the bears wrong before.
Rule Breakers show up in new, rapidly growing industries. Hansen Natural started selling its natural fruit beverages in 1935, but the company's Monster energy brand appeared 62 years later, in 1997. Competitor Red Bull, which is private, was founded 10 years earlier and modeled its energy drinks after beverages that were already popular in Thailand, but Red Bull originally concentrated on the European market and didn't sell energy drinks in the United States until 1997.
Rule Breakers take advantage of their competitors' mistakes. Red Bull quickly established itself as the leader in the United States' energy drink market, but the small size of its energy drink cans provided an opportunity for competitors such as Monster. Red Bull's 8-ounce cans sold well in Europe, but soda companies in the United States typically sold 16 ounce soda cans. When 16 ounce Monster drink cans showed up on shelves in the United States, they also cost the same as the 8 ounce Red Bull cans. As Matthew Boyle's Fortune article mentions, this was the same strategy that Pepsi (NYSE: PEP) used to gain a foothold in the soft drink industry while competing with Coca-Cola (NYSE: KO) in the 1930's. Pepsi's executives knew that competing with Coca-Cola through traditional advertising channels alone would be very difficult because of Coca-Cola's prominent marketing campaigns, but shoppers during the Great Depression paid close attention to price and value, so Pepsi sold soft drink cans that were twice as big as Coca-Cola cans for the same price and took some market share from its well-known competitor. Monster management stayed ahead of competitors' pricing strategies in 2012 by selling 10 packs of Monster energy drinks, while other energy drink makers typically offered 4 packs at most.
Rule Breakers show rapid stock price growth. Monster's web site shows that its stock rallied from $22.15 per share at the close of 2007 to $46.07 at the end of 2011, although the stock did dip in 2008 because of the global financial crisis. Monster even declared a stock split in early 2012, another indicator of a rapidly rising stock, and its current price has reached $63.53 a share.
Rule Breakers have visionary executives who understand product design. Rodney Sacks completely revitalized Hansen after he took it over in 1992, converting a niche natural juice company into a brand that was associated with energy drinks and extreme sports. A less visionary CEO could have just shut down a few brewing plants or raised prices on Hansen's fruit juice drinks to boost Hansen's margins, instead of designing an entirely new product line and brand image. A Hansen that still earned most of its revenue from fruit juice would not have the kind of growth potential that Monster Energy offers, and it definitely couldn't pose a real challenge to Pepsi or Coca-Cola.
Rule Breakers' products satisfy their customers. Monster's energy drinks do what their labels promise, although the company does not have a unique competitive advantage here, as another company's energy drink can also offer a major caffeine kick. Monster's volume pricing does allow the company to offer energy drink buyers more opportunities for a performance boost. A shopper who gets used to using energy drinks as a pick me up will definitely appreciate finding a 10 pack on the shelf.
Rule Breakers' stocks are often seen as overpriced. At a P/E ratio of 41.52 today, it's not very unusual for an investor to argue that the market is too enthusiastic about Monster. This Seeking Alpha article made an overvalued call in February when Monster's P/E ratio was 36.6, which was still much higher than other beverage companies. A Smart Trend post called Hansen Natural potentially overvalued when it had a P/E ratio of 30.3 last year. Monster looks like it meets all of the Rule Breaker criteria to me.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, and PepsiCo. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.