Monster Beverage: Part of a Speculative Frenzy Market?

By Chad Henage - March 7, 2012 | Tickers: TAP, MNST | 0 Comments

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(Editors Note: A previous version of this post incorrectly stated that Herb Greenberg is a contributor at thestreet.com. He is currently a contributor at CNBC. We apologize for this error.)

I couldn't help but write something in response, when I saw Herb Greenberg of CNBC make the comment that this market was in a “speculative frenzy.” Don't get me wrong, I like a lot of what Herb has to say, but the wording of this remark seemed short-sighted at best. He mentioned specifically that he couldn't believe that the market value of Monster Beverage (NASDAQ: MNST), with $1.7 billion in annual revenue, is valued 25% higher than Molson Coors Brewing (NYSE: TAP), with $3.5 billion in revenue.

The part that frustrated me about his comment, is the fact that companies are not valued just on revenue. His statement assumes that a company with more revenue is worth more. This ignores the growth potential of a company and its future prospects. This also ignores debt levels, cash flow, and other metrics that investors use to value stocks. Herb believes that zero percent short term rates are driving this speculation. My thought is, let's compare these two companies and see if the market is pricing the stocks correctly, or if there is indeed a speculative frenzy at work here.

The numbers to the far right of the table pretty much sum up everything. On a PEG basis, Monster Beverage actually trades at a 10% premium to Molson Coors. Its 25% higher valuation, that Herb was referring to, is in market cap and not based on earnings. The short version as to why Monster Beverage should trade at a 10% premium, is the company is expected to grow earnings at a 129% greater rate. I'm sorry, but this doesn't seem much like speculation to me. If I can buy a company for 10% more, that is growing earnings at more than double a competitor that's not a bad deal.

There are other factors to valuing a stock, besides earnings and current price, so let's look at yield first. Part of the reason that Molson Coors is valued at $43 a share, is because of their current yield. The company pays a dividend that yields about 2.98%. This is a big deal for Molson Coors, and without the dividend the stock would be marked down. Monster Beverage pays no dividend as this company is investing in their growth, rather than paying back earnings to shareholders. A good way to level the playing field is to use a ratio called the PEG+Y. This ratio looks at the company's growth and dividend, and compares the combined rate to earnings. This is a useful tool when comparing dividend and non-dividend paying stocks. Monster Beverage has a PEG+Y of 0.50 versus Molson Coors ratio is 0.82. With the PEG+Y ratio, the higher the number the better. This tells the whole picture and says that Monster Beverage is actually trading at over a 60% premium to Molson Coors. The reason for the big change versus PEG ratios, is because the PEG+Y includes Molson Coors' dividend in the total return.

Cash flow can sometimes show a more true picture of how a company is doing. Let's see how Monster Beverage and Molson Coors stack up by this measure. Monster Beverage has generated about $0.22 per $1 of assets, in free cash flow in the last 4 quarters. Molson Coors by comparison, has generated about $0.032 per $1 of assets, in free cash flow over the same period. If Mr. Greenberg is looking for why Monster Beverage is valued more highly than Molson Coors, he need look no further. Monster Beverage is generating free cash flow at over 5 times the rate that Molson Coors is. Considering Monster Beverage is a relatively young brand, it's amazing to see such a disparity. This additional cash flow alone allows Monster to invest for future growth, buyback shares, and even means a dividend would be possible.

Another factor to look at, is the relative strength or weakness of each company's balance sheet. If I have a choice, I want a company with as little debt and as much cash as possible. Monster Beverage holds about $700 million in combined cash and investments, and reports no long term debt. Molson Coors holds about $3.6 billion in cash and investments, versus about $2 billion in long term debt. With both companies showing a net cash position, their balance sheets aren't a concern.

So bottom line, is this a speculative frenzy or fair market pricing? I would say based on everything we've seen, that Monster Beverage deserves its premium to Molson Coors. Monster Beverage is expected to grow earnings more than twice as fast, and generates 5 times the cash flow per $1 of assets. The additional cash flow generation alone makes the stock much more attractive. I'm going to back up that call by placing an outperform on MNST today on CAPSCall. Check out MNST for yourself and see if it's time to “unleash the beast."

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