Coca-Cola & Monster: An Investment Outlook
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are looking to have a soda drink or two for New Year's, you may just want to buy the producers of those products. Coca-Cola has driven consistent earnings growth through bad times and goods and is trying to penetrate new markets through innovations and investments. Monster, meanwhile, has several catalysts that could create value for shareholders despite the high growth rate that is necessary to justify the current valuation. Below, I review both producers.
Coca-Cola (NYSE: KO): Going Strong
As perhaps the strongest brand in the world, Coca-Cola has a leading economic moat. It has succeeded where others, like PepsiCo (NYSE: PEP) and Dr. Pepper, have failed. Going forward, what attracts me to Coca-Cola is that it is not resting on its laurels--which is good in its own right in terms of providing dividends and consistent growth--but innovating through investments. The large acquisition of a stake in Aujun Industries helped the beverage producer gain a greater position in the Middle East and take away share from PepsiCo, the market leader. In recent days, the company took a major stake in the recently launched Fair Oaks Farms, which targets the dairy segment and thereby broadens Coca-Colas core soda business. Then before that, there was the $1.3 billion investment in Chile, where a new plant will be built. $300 million is being allocated to Vietnam, where PepsiCo is actually exiting, to penetrate growth. A partnership with Sanofi will also get beauty drinks out in France. And, in terms of marketing, the company is putting $10 million into Spotify, a provider of Internet music streaming.
It is even making a massive multi-million dollar overhaul of its website that will look and operate like an online magazine. Sections include "environment", "sports", and "health", among others (see here). Sure, it sounds weird, but it sends a signal to the market that the company is dedicated to innovation. Just a 0.01% favorable market reaction to the new change would create $16.8 million in new value and thus more than cover the costs. It would be a superior return to other investments for so little that is invested in such a short period.
Coca-Cola's momentum is also better than Pepsi's, which has seen domestic beverage decline by 3% in the third quarter versus a 2% gain for Coca-Cola. The former trades at 19.6x and is forecasted for 8.2% annual EPS growth over the next five years. PepsiCo is only forecasted for a growth rate of only 6.2%, and the 30 bps greater dividend yield does not offset.
Monster Beverage (NASDAQ: MNST): The Good & The Bad
Monster is down 34.9% from the 52-week high, largely as a result of regulatory concerns. These concerns stem from the government's investigation of 5-Hour Energy drink after 13 supposedly related deaths. But 900 billion worth of units sold only gave rise to an astonishingly low 859 negative reports for Monster Energy drink. The greater concern should be that the shares are overvalued. The stock trades at a respective 30x and 23.5x past and forward earnings. Though Stifel Nicolaus upgraded the stock from "hold" to "buy" with a $65 price target on December 11, it would take a lot of growth to justify the current valuation.
At a reasonable 10% discount rate and 17x multiple, it would take precisely more than a 30% annual EPS growth rate in the next half decade to warrant the current valuation. It is, by no means, an undervalued stock base on the current forecast for 19% annual EPS growth over the next 5 years. The growth rate was only 25.3% in the past 5 years, so it's risky expecting incredible outperformance. Moreover, rising expenses are outweighing top-line gains.
There are several reasons to be optimistic about Monster. First, I find that the negative market reaction to an FDA investigation of the energy drink market was overblown. While the regulatory agency will probably find something to complain about, it’s hard to implement a disclosure that will meaningful disrupt volume. Second, the company is taking away market share from competing products in convenience stores, as evidenced by the 23.6% rise in sales--more than double Red Bull's pace. The launch of product internationally will also catalyze revenue and keep investors focused on the upside.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Monster Beverage and 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!