2023-06-26 14:05:20 ET
Summary
- Qualitative factors and key metrics suggest that Monster Beverage Corporation presents a GARP opportunity.
- The company is growing at scale and holds down a significant part of the energy drinks market.
- Emerging market expansion and consistent product innovation lend the firm additional prospects for growth.
- Monster's PEG ratio and an absolute valuation imply that the stock is undervalued and possesses embedded growth.
- Risks like vague revenue recognition practices and an uncertain financial market environment exist. Nonetheless, we believe that Monster Beverage stock provides a prime investment opportunity.
The generational consumer shift into stimulated drinks lends researchers much scope to delve into the prospects of Monster Beverage Corporation ( MNST ) . The company's stock has surged by approximately 483% in the past ten years; however, many analysts believe the asset has reached its peak.
In our view, Monster remains a decent investment opportunity with GARP (growth at a reasonable price) attributes; here's why.
Operating Highlights
Earnings Review
Monster Beverage Corporation recently released its first-quarter earnings report, revealing record earnings with immaculate year-over-year growth.
During its previous operating quarter, Monster achieved an 11.9% year-over-year increase in sales. The headline figure itself is impressive; however, we think the company's act of increasing its product prices and stretching its gross profit margins by a net 1% year-over-year should be a prominent talking point as it shows Monster's ability to increase prices and pass down higher input costs to its consumers during periods when most companies are faced with compressed income statements.
Furthermore, Monster's broad portfolio of energy drinks provides it with prospects to realize synergies pertaining to cross-market sales and lower production costs. In essence, we think the brand is well-placed to increase its investors' residual value in the coming years.
Looking ahead, we anticipate more growth from Monster Energy Drinks (the firm's main segment) and strategic brands. The prior has a market share of approximately 30.1% , allowing it a stronghold within the carbonated energy drinks space. Moreover, the firm's strategic brands division possesses an enclave of brands that provides Monster Beverages with the necessary latitude to secure product differentiation and additional market share within an industry with a compound annual growth rate of roughly 11.9% .
Evidence shows that Monster Beverages has tried to sustain growth through continuous innovation of its primary brand. In addition, Monster has acquired numerous other brands and expanded into a new market, namely alcoholic beverages.
We believe Monster's continuous innovation has led to robust sales growth. However, we are skeptical of the firm's endeavors into alcoholic beverages. Sure, entering the alcohol market means a less saturated revenue mix; however, the alcohol industry has already matured, meaning it is fragmented, hosts high barriers to entry, and does not possess many high ROI investment opportunities. In fact, alcoholic drink sales are forecasted to grow at merely 2.5% per year until 2031, approximately a fifth of the rate of energy drink sales. Thus, aggressive investments in alcoholic beverages might result in inefficient capital allocation.
Despite our bearish outlook on the firm's expansion into the alcohol space, Monster Energy's increasing footprint in emerging markets leaves it with plenty of untapped growth to take advantage of. For example, it is believed that energy drink sales in the Asia Pacific could proliferate at 7.6 % per year until 2028, which is lucrative without considering the additional cost-cutting advantages that emerging markets present.
In essence, Monster Beverage Corporate is growing at scale and possesses additional growth opportunities. However, the question now becomes: Have investors already priced the company's potential?
Let's traverse into a discussion about Monster's valuation to find out.
Absolute Valuation
At face value, most will accept that Monster's salient valuation metrics are worrisome, and we absolutely concur. However, the stock's PEG ratio of 2.45 juxtaposes the argument as it is at both a sector and historical discount. The PEG ratio reveals a company's price-to-earnings growth and often displays whether a stock is a GARP opportunity.
Although more factors must be considered before labeling Monster's stock a GARP opportunity, the PEG ratio provides a strong indication.
Furthermore, the expanded price-to-earnings valuation metric implies that Monster's stock has value in store. According to the formula, Monster Energy's fair value (for investors with a time horizon of 18 months) is around $65.68 per share, suggesting that it is undervalued on an absolute basis.
Formula = Normalized P/E x Expected EPS for December 2024 = 36.49 x 1.80 = $65.68
Potential Risks
Despite our positive outlook of Monster Beverage Corporation, its stock possesses various risks that investors should beware of.
Let's discuss a few of the risks that we have identified.
Revenue Recognition
Monster usually recognizes its revenue on a "transfer of control" method, which includes the delivery of goods or the shipping of goods, depending on the agreement with its buyers. This tables a key risk as this method of recognition records revenue before payments have occurred; in addition, it is a vague method of recognition and allows risk factors such as "channel stuffing" to enter the fray.
Although Monster is yet to show signs of manipulating its earnings, investors must keep its vague recognition policies in mind when assessing its income statement.
Financial Market-Based Risks
Another concern for Monster is its financial market-based activity. Apart from possessing elevated relative valuation metrics ( compared to its peers ), the stock's value-at-risk is substantial. Credible sources believe the U.S. stock market is set for a technical retreat, and Monster's stock would lose significant value if such an event had to occur.
Final Word
Our analysis shows that much of Monster Beverage Corporation's growth prospects are yet to be priced by the market.
The company's continuous innovation, robust market share, and clever acquisitions lend it an opportunity to enhance its pricing power while cutting costs via synergies. Moreover, a critical GARP metric and an absolute valuation method suggest that the stock is underpriced.
With all factors considered, we deem Monster's stock undervalued.
For further details see:
Monster Beverage Corporation: Still A GARP Opportunity