Why Do Hedge Funds Love Monster Beverage?
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Monster Beverage (NASDAQ: MNST) is still up about 30% for the year after falling in price since the middle of June. During the second quarter, many hedge funds tracked by Insider Monkey added shares to positions in Monster Beverage according to their 13F filings. Billionaires Jim Simons and Steve Cohen’s funds (Renaissance Technologies and SAC Capital) increased their respective positions to 2.8 million and 2.2 million shares. Two other hedge funds in our database reported positions worth over $100 million in their 13Fs: Hoplite Capital Management, which increased its stake by 54% (see more of Hoplite's favorite stocks) and Arrowstreet Capital, whose 1.5 million shares are nearly double what the fund owned at the beginning of April. In addition, thanks to its recent decline the stock currently trades below its second quarter lows, meaning its price, logically, is lower than when each of these managers added to their position (of course, given the delay since the end of the quarter, they may have sold shares by now).
Monster’s energy drinks have a certain appeal to younger consumers, powering the company to an increase in revenue of about 50% between 2009 and 2011 as the U.S. economy experienced a weak recovery. This trend has continued so far this year, as the company’s 10-Q reported a 28% increase in revenue in the second quarter of 2012 compared to the same period in the previous year. For the first half of the year, the increase was again 28%. Note that this revenue growth rate is higher than the annualized rate between 2009 and 2011, suggesting that so far Monster has actually managed to increase its growth rate as the company increases in size. These gains have also affected the company’s bottom line as net income rose 33% and earnings per share rose 35% in the first half of the year compared to the first half of 2011.
The stock trades at 33 times trailing earnings, but given this strong growth rate that level may be warranted. Assuming, as the Street does, that this year’s earnings per share hit $2.01 and that 2013 sees EPS growth of 23% compared to 2012, the forward P/E is 24. The company will still have further growth from that point, though the five-year PEG ratio of 2 implies that the stock price may still be too optimistic even after the pullback. Investors should also note a low beta of 0.2 makes explicit what is implied in the company’s rapid growth over the past couple years: statistically, there is only a weak link between the broader market and movements in Monster’s stock.
The closest peers for Monster are other soft drink companies, which tend to have much lower growth rates and are priced accordingly. PepsiCo (NYSE: PEP), which counts Mountain Dew among its soda products, trades at trailing and forward earnings multiples of 19 and 17 respectively but saw its business shrink in its most recent quarterly report compared to the same period in 2011. PepsiCo also pays a 3% dividend yield. Coca-Cola (NYSE: KO) trades at a slight premium to Pepsi due to its market leadership position, with a trailing P/E of 20 and a forward P/E of 18. Its business was stagnant last quarter, trumping Pepsi’s decline. Dr. Pepper Snapple (NYSE: DPS) is another comparable company, reporting earnings growth of 4% last quarter compared to a year earlier; it trades at 14 times forward earnings estimates, just over half of Monster’s multiple. Dr. Pepper Snapple is also considerably closer in size to Monster than Coca-Cola or PepsiCo. There’s a point at which Monster’s price falls low enough to make it a buy, and right now it is lower than the price at which a number of hedge funds bought in. We are also confident that the company will continue to grow. However, given the high multiples which still make the company look at best fairly priced on a forward basis we are still reluctant to endorse the stock and would prefer a more value-priced beverage option such as Dr. Pepper Snapple.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks discussed in this article. 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.If you have questions about this post or the Fool’s blog network, click here for information.