2023-11-21 11:04:51 ET
Summary
- Monster Beverage is a leader in the energy drinks market, with a strong financial position and growth potential.
- The company's business model focuses on energy drinks, strategic brands, and alcohol brands, with a capital-efficient approach.
- The energy drinks market is expected to grow significantly, and Monster Beverage's sales have shown consistent growth with high margins.
Investment Thesis
In the dynamic landscape of today's business world, certain markets stand out as beacons of potential growth and opportunity. Among these burgeoning sectors, the energy drinks market shines prominently, projecting robust expansion for the foreseeable future. At the helm of this thriving domain stands a true industry leader - Monster Beverage (MNST) - distinguished not only by its unparalleled position in the market but also by the magnetic appeal of its powerful brands, irresistibly drawing the attention of a particularly young and vibrant audience.
Central to Monster Beverage's success is its highly capital-efficient business model, an achievement made possible through a strategic collaboration with none other than the iconic brand, Coca-Cola ( KO ). This alliance has further solidified the company's financial prowess, making it a force to be reckoned with in the market. As we look ahead to the upcoming years, Monster Beverage's remarkably strong financial position positions them ideally to seize upon any emerging opportunities and capitalize on the dynamic market landscape.
In light of these compelling factors, I firmly believe that the acquisition of Monster Beverage, at a reasonable price, could prove to be an exceptional investment, offering returns that exceed the promising threshold of 12%. In this analysis, we will explore the key drivers that make this venture so enticing, and why prudent investors should seriously consider adding Monster Beverage to their portfolios.
However, before we delve into the analysis, I want to share an interesting fact about this company that some of you may not be familiar with: Monster Beverage has been the top-performing company in the entire American stock market since the year 2000. It has delivered higher returns than giants like Apple (AAPL), Amazon (AMZN), Tesla (TSLA), and Nvidia (NVDA). So, let's explore this company further to discover what makes it so extraordinary.
Twitter
Business Model
Monster Beverage markets its beverages across three distinct segments:
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Monster Beverage Drinks: This segment is the cornerstone of the company and includes brands such as Monster, Reign, and True North. These brands are all energy drinks, designed not just for pleasure but to serve specific functional purposes. They aim to enhance concentration, boost energy levels, and help consumers stay awake when needed.
Monster
Monster Beverage continually develops a diverse range of flavors for its drinks, providing customers with new and exciting experiences regularly. This approach fosters strong connections with their audience. Moreover, Monster Beverage is actively embracing the growing demand for healthier lifestyle choices by offering sugar-free options, appealing to new and health-conscious target groups. As a result, it is becoming increasingly common to see people at the gym, using these beverages during their workouts, or students relying on Monster to improve their performance.
2. Strategic Brands: As part of the strategic partnership between Monster Beverage Corporation and The Coca-Cola Company in 2015, Monster acquired several energy drink brands from Coca-Cola, including NOS, Full Throttle, Burn Energy Drink, and Relentless Energy Drink. In return for these brands, Coca-Cola received approximately a 16.7% stake in Monster Beverage Corporation, making it a significant shareholder in the company.
3. Alcohol Brands: This is the most recent segment of the company, stemming from the acquisition of CANarchy in February 2022. Through this strategic purchase, Monster enters a new sector, allowing for the diversification of its revenue streams and presenting a significant potential for long-term sales growth through further acquisitions.
Monster subcontracts the manufacturing of finished products to external bottlers and contract packagers, offering several advantages. By not having its own production facilities, the company becomes less capital-intensive and maintains a lower burden of financial debt. Additionally, this practice provides flexibility in the face of changes in demand or the market, as they can quickly adapt and outsource production to existing contractor partners.
Monster procures ingredients and supplies from suppliers, which are then delivered to the external bottlers and packagers. These partners carry out the manufacturing and packaging of the products based on the recipes and formulas provided by Monster. In some cases, the bottler may also add carbonation to the products during the production process. This strategy allows Monster to focus on its core expertise and the development of innovative products, while its contracted partners handle the production. Moreover, collaborating with multiple external bottlers provides flexibility to respond to market changes and ensures the timely delivery of products to the end consumer.
Monster also invests a significant amount of money in marketing to elevate its brand and associate the Monster image with extreme sports and feelings such as bravery, courage, and strength. This marketing strategy has already proven successful for their main competitor, Red Bull, so it makes sense to emulate it. To achieve this, they have partnerships with renowned and influential figures, such as Lewis Hamilton , with whom they have already launched several collaborative flavors.
Monster Ads
Market prospects
The energy drinks market is expected to experience remarkable growth during the next decade, both within the USA and internationally, far surpassing the GDP levels and gaining market share from other non-alcoholic beverages worldwide. As an industry leader, and through further mergers and acquisitions in the future, Monster will manage to solidify its long-term growth and increase sales even slightly above the sector's average.
Grand Market Research
Income Statement
As can be seen in the following graph, the company's sales have experienced an incredible compound annual growth of 14% since 2012. Even more relevant than this figure is the solidity of the growth, as the growth rate has remained almost constant every year. This robust growth has been made possible by the increase in organic sales both in the United States and internationally, coupled with the company's ability to raise prices.
It is important to note that a can of Monster contains 0.5 liters of product, while a Red Bull contains half of that amount, yet the prices are similar. This suggests that there is still potential for untapped price increases.
Koyfin
The aspect that most affects the company and contributes to some cyclicality is its costs. It's important to consider that the company is highly sensitive to sudden changes in the price of its raw materials, such as aluminum. This becomes evident when analyzing the company's margins in 2022, which declined due to the inflationary pressures experienced worldwide. However, with inflation now subsiding, we can observe how Monster Beverage's margins are starting to recover.
The following graph illustrates the remarkably high margins this company achieves, thanks to its capital-light business model. Additionally, the ongoing margin recovery in recent quarters may act as a catalyst to drive short and medium-term profits.
Koyfin
Balance Sheet
Monster Beverage's balance sheet is one of the best I've ever seen. They have no long-term debt and maintain a substantial cash reserve. Therefore, it's not surprising to see that the company's net debt has always been negative, meaning they have more money than debt. This solid financial position allows them to seize market opportunities to acquire competitors or make strategic investments. For instance, there have been recent rumors that Monster could acquire competitor Bang for around 400 billion dollars. Thanks to their healthy balance sheet, they could execute this acquisition without taking on debt, which provides a competitive advantage in the industry.
Koyfin
Capital Allocation
The primary use of cash for the company is to sustain organic growth through strategic investments and inorganic growth through mergers and acquisitions, as we have seen in various examples throughout this article. From my perspective, this strategy allows companies to multiply their value many times over the long term, and Monster has been executing this strategy flawlessly for many years.
Monster Beverage does not pay dividends, and it is unlikely that it will do so in the short term as long as it can reinvest the money to grow its business. If you are seeking dividend-paying companies, this might not be the right place for you. However, if you are looking for compounders, Monster could be a good option. Lastly, they use excess cash to buy back shares, although they do not usually consider the stock's valuation for these repurchases. They simply allocate the surplus cash to reduce the outstanding shares year after year, which is commendable.
Risks
As this is a company that is somewhat defensive, there are few risks in this thesis, but there are some important ones that we must take into account:
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Problems with bottling partners: Not having your own manufacturing and distribution facilities has the advantage of making the company less capital-intensive, but it also means relying heavily on external bottling partners. These partners could exert pressure to increase prices or even terminate the relationships, leaving the company without distributors.
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Negative perception of sugary and energy drinks: Some segments of society view sugary and energy drinks unfavorably, which could lead to image problems for Monster Beverage.
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Sensitivity to commodity price volatility: Monster Beverage is highly sensitive to the volatility of certain raw materials. Fluctuations in the prices of these materials could impact the company's costs and profitability.
Valuation
Monster Beverage is a company that has historically traded at relatively high valuations. In my opinion, its highly scalable, capital-light, and profitable business model, combined with its exceptional financial position, justifies a multiple higher than the market average. However, this does not mean that one should pay any price for it. Let's examine two valuation methods.
Multiples
If we project a 35% earnings growth (analysts' consensus estimates 36%) for this year 2023, and then taking into account that the market is expected to grow at 9%, along with some operational leverage and inorganic growth, I estimate growth rates between 10% and 15% until the year 2030. Applying a multiple of 25x, which is below its historical average (33x), we find that the market capitalization in 2030 should be $131 billion. Compared to the current market cap of $60 billion, this implies a compound annual growth rate of 10.25%.
DCF
However, I prefer using the Discounted Cash Flow ((DCF)) method for valuation, as it allows capturing the terminal growth of companies. For the same reasons I mentioned earlier, I assume a 15% Free Cash Flow ((FCF)) growth. Then, I apply a 10% weighted average cost of capital ((WACC)), which is the one I like to use the most. Finally, I believe that a defensive company with these characteristics and strengths can be assigned a terminal growth rate of 4%. As a result, we arrive at a present value of approximately $45.
Self-made
Considering both valuation methods, the stock appears to be slightly overvalued, and I would ideally prefer to buy it at around $48-50. However, I want to emphasize one thing, as Warren Buffet famously said, "I would rather pay a fair price for a wonderful company than a wonderful price for a fair company."
Conclusion
In conclusion, Monster Beverage is an excellent business operating in a market with promising characteristics, and it is well-managed. While it may often seem to trade at high valuations, I believe these valuations are justified given the strong attributes. However, it's essential to exercise patience and seek opportunities to purchase the stock at favorable prices to potentially achieve good returns.
For further details see:
Monster Beverage: High Valuation Appears Justified