Monster Luck Rally
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Things have been good for Monster (NASDAQ: MNST) lately. With consistent new product roll outs, including collaborations with celebrities like Snoop Dogg on their DUB Edition energy drink brand, Monster has managed to stay fresh and relevant, earning a loyal following, especially among the young male demographic.
Monster derives roughly 95% of its revenue from sales of its energy drink products, prompting the company to change its name from Hansen Natural Corporation to Monster Beverage Corporation in early 2012 to better reflect the brand’s focus.
Over the past five years, Monster has managed to grow revenues by an average of 24% annually, compared with Coca-Cola and Pepsi’s estimated average of 14.5%. Q1 net revenue jumped more than 38% from the same period last year, from $55 million to more than $76 million, outperforming rivals Red Bull and Rock Star.
If you had put $1,000 into Monster stock ten years ago, that investment would now be worth more than $260,000, which works out to an average return of almost 75% year over year. By comparison, the S&P delivered only 13.4%.
With a healthy balance sheet, zero debt and available cash to fund expansion, Monster is well positioned to weather, and even prosper, during this period of economic troubles when even the biggest players like Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) have seen revenues fall to their lowest points since 1996.
Monster is trading at 26.7 times EBITDA, making it the most expensive of all soft drink companies in North America to acquire in the sector with a market cap north of $500 million. There was some speculation that Coca-Cola had made a bid for Monster to the tune of $11 billion (23 times EBITDA), but those rumors have been denied by Coca-Cola. It was announced recently that Monster will take over Sara Lee’s spot on the S&P 500.
Overseas sales of Monster accounted for just 20% of revenue in 2011, leaving lots of room for growth abroad. The company has already expanded into South America and in Asia, with retail distribution in Ecuador, Hong Kong, Macau and Japan. Gross overseas sales for Q1 2012 topped $100 million, up significantly from $72.8 million during the same period in 2011.
Competitors to Monster have launched numerous products into the market in an attempt to take a bite out of their market share with little success. Eventually Coca-Cola had to bow before the Monster and cut a distribution deal with them as their energy drink products were powerless; delivering more than half of Monster’s volume for them now.
Since the announcement of the S&P 500 substitution and the latest Fed policy meeting, the stock has been under pressure as the growth premium is being whittled off the price. June 27th saw a 4.4% drop to $71.09 negating a reversal buy signal from the previous close. Yes, growth stocks can push higher on momentum for a lot longer than their fundamentals would suggest, but the price action in Monster since mid-June is saying profit-taking is overwhelming that momentum. There looks to be solid support in the $62 to $65 region. Selling September or later puts at $60 looks like a good way to get paid to wait and if the stock gets caught in a backlash, one can cover for a small loss or be put in the stock at $58 per share.
PeterPham8 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.