This Was a Monster Quarter
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So when investors get exactly what they want, the stock goes down? This seemingly is what happened with Monster Beverage (NASDAQ: MNST) recently. The main argument against investing in Monster was the stock was valued too highly given analysts expected 15% growth rate. I've made the argument in the past that Monster would be an attractive takeover target for Coca-Cola (NYSE: KO) as the companies already have a strong business relationship. What's interesting is Monster just turned in a great quarter with growth rates far above analyst's long-term growth projections. Let me quickly take you through what the company reported, and why I think the recent sell-off is overdone.
To understand the strength of Monster, you have to understand that the beverage industry has done an about face in the last several years. In the past, companies like Coca-Cola and PepsiCo (NYSE: PEP) used to grow by leaps and bounds on the back of their sodas. However, over the last few years as consumers have become more health conscious they have turned away from sodas and to pre-packaged waters, teas, and energy drinks. While it seems strange that people would turn away from sodas and to energy drinks, it shouldn't be all that surprising.
Think about the increased speed that most consumers are being asked to move today. Individuals are trying to do more in less time and need something to get them moving. Energy drinks in particular, appeal to younger consumers who are more likely to grab a cold energy drink rather than brew a pot of coffee like their parents. Of the big drink makers, only Dr. Pepper Snapple (NYSE: DPS) seems to be missing this trend. The company has virtually no presence in water and with Venom being their primary energy drink, this name doesn't even register as a top brand.
The co-leaders in energy drinks are Red Bull and Monster with others being left to pick up the scraps. On a consistent basis, energy drinks have been the fastest growing segment of the drink market. Not only is Monster seeing this growth, but even Coca-Cola has seen over 20% growth in their own energy drink brands. Since this is the fastest growing segment of the drinks market, and Monster is one of the top names, the company's growth shouldn't be surprising.
Monster saw sales increase 28.2%, which drove EPS growth of 31%. Unlike other companies that have increased prices to offset volume declines, Monster also saw hugh volume growth with case sales up 29.94%. Not only does Monster sell multiple energy drinks, but the company also has an upcoming brand of tea called Peace Tea. With tea sales growing at the second fastest pace in the drink market, this gives Monster key brands in the two fastest growing drink markets. Having a presence in these two key markets should keep Monster growing much faster than its competition.
When you consider that Coca-Cola, the argued leader in beverage sales, saw volume growth of just 4%, you can see the struggles of organic growth in the beverage industry. PepsiCo saw volume growth of just 2%, and Dr. Pepper Snapple actually saw volume sales decline by 1%. In addition, unlike most of the company's competition, Monster gets the majority of its sales from the U.S. with just 23% of total sales coming from international sources. You can see that this company not only has organic growth that its competition can't match, but Monster can also grow internationally for years to come.
Looking at the valuations in the industry, after the more than 20% decline since earnings came out, this could be a good long-term entry point for investors. With Monster selling for about 28.8 times 2012 earnings, and now 23.5 times 2013 earnings, the stock is certainly cheaper than it used to be. While analysts are calling for 15% long-term earnings growth, over the next few years these same analysts are calling for about 25% revenue growth this year, followed by nearly 17% revenue growth next year. Considering that Coca-Cola saw 13% volume growth in tea and 21% growth in energy drinks, I don't believe that Monster will be limited to 15% earnings growth.
Analysts have had to adjust their earnings expectations and have raised estimates for 2012 by 8.5% in the last three months, and 2013 estimates have been increased by 10.13%. Considering that Coca-Cola sells for nearly 20 times earnings and yet has half the growth rate of Monster, it seems there could be some value here. Even PepsiCo and Dr. Pepper Snapple sell for 17 and 15 times estimates and have much lower growth rates than Monster. While it's true that Monster does not pay a dividend and all three competitors pay yields north of 2.5%, this yield is not enough to make up for a much lower growth rates. Monster has taken a hit recently, but it still seems this company could roar in the future.
MHenage 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.If you have questions about this post or the Fool’s blog network, click here for information.