Why You Should Go Monster On Beverage Stocks
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems like soda and soft drinks are almost always featured in the daily media these days. From Mayor Bloomberg's proposal to tax large soda drinks to the indicting federal investigation of 5-Hour Energy Drink, the issues seems to be health concerns, health concerns, health concerns. But hasn't it always been so? Consumers are well aware of the dangers of high fructose corn syrup, and, in the grand scheme of things, more media attention to it won't make a meaningful difference to altering growth trajectories. Thus, I encourage a combination of buying shares in firms with stable economic moats and those with compelling momentum.
Coca-Cola is one of those blue chip companies that every "buy-and-hold" investor ought to consider. With a 2.8% dividend yield, consistent earnings growth, and only a 51.2% payout ratio, the company appears to be the definition of "safe". But at a respective 19x and 16.7x past and forward earnings, it may be a little too expensive. Growth opportunities seem relatively limited given macro headwinds and increasing political resistance against soda (hello, Mayor Bloomberg).
I don't think so. Over the last 5 years, Coca-Cola has grown free cash flow from $5.7 billion to $7.6 billion--a CAGR of 5.9%. Net income has also been on the steady rising, gaining by a CAGR of 8%. When you factor in 50% less volatility than the broader market, expanding margins, and a consensus price target of $42.38, it is a safe growth investment. In addition, high multiples of peers will also keep momentum greater on the upside level.
PepsiCo, for example, has similar multiples despite much weaker fundamentals. Free cash flow has grown by a CAGR of 4% over the last 5 years--underperforming its popular peer, which has to contend with the "law of large numbers". PepsiCo has also only grown EPS by 3.8% over the past 5 years versus 11.3% for Coca-Cola. While ordinarily this would be enough to get the CEO booted; but, sadly, the CEO chairs the board--a substantial corporate governance flaw. Chairman & CEO Indra Nooyi remains at the helm despite much shareholder protest.
To her credit, however, she has consistently beaten analyst expectations over the past 5 quarters with an average beat of 2.5%. This was better than the performance of Coca-Cola. And shareholders seem to have ignored this, since PepsiCo underperformed its competitor by 418 bps, with a return of 5%--also lower than the S&P 500.
Don't Let Multiples Prevent You From Going Monster (NASDAQ: MNST)
While Coca-Cola and PepsiCo are both expensive stocks, their multiples are dwarfed by those of Monster Beverage. Monster, the producer of energy soft drinks, trades at a respective 25x and 19.4x past and forward earnings. Analysts currently rate the stock closer to a "sell" than a "buy". But some, like Stifel Nicolaus, are rating the stock a "buy" with a $73 price target--a 60% premium to the prevailing price.
In my view, Monster is a "speculative buy". With double-digit ROA, ROE, and ROI, the momentum looks bright--though this has started to plateau. FCF has risen dramatically from $131 million in 2007 to $287.8 million today--a 16.9% CAGR. Analysts forecast 15% annual EPS growth over the next 5 years (well below the 25.3% rate achieved during the past 5 years. Assuming expectations are met, 2016 EPS will come out to $4.73, which, at a multiple of 20x, translates to a future stock value of $94.60. Discounting backwards by 10% yields a present value of $58.74--a meaningful premium to the current market assessment.
Equipped with a strong balance sheet (current ratio: 3.56x) and expanding margins, the upside looks good. This is particularly true given that the company is taking away market share from competitors. As Goldman Sachs rightfully noted, sales growth for Monster (23.6%) have been roughly double Red Bull--a reversal of earlier monthly trends. Some have dumped shares in light of concerns over 5-Hour Energy Drink, which 13 deaths have been speculated to be associated with. But with only half as much caffeine as a normal cup of coffee, I see this as an overreaction that will be corrected shortly. For these reasons, and many more, I encourage buying shares despite the high multiples.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company, Monster Beverage, and PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!