2023-09-11 09:00:43 ET
Summary
- The global energy drink market is projected to grow significantly.
- Monster effectively leverages athlete endorsements to boost brand visibility and gain market share.
- Monster Beverage excels in capital allocation through acquisitions, ROIC, and share repurchases.
- MNST could offer an 11% CAGR but lacks a margin of safety due to high multiples.
Investment Thesis
In my view, Monster Beverage Corporation ( MNST ) is a stock to hold for now, given its current valuation. The company has a strong presence in the expanding global energy drink market and has successfully leveraged athlete endorsements to boost its brand. However, the current share price doesn't provide an adequate margin of safety. Monster's capital allocation is commendable, highlighted by a robust ROIC and the opportunistic acquisition of Bang Energy. Yet, the projected 11% CAGR relies on a high exit multiple of 35, introducing risk if the company's growth falters. For these reasons, despite its solid business model and growth trajectory, Monster Beverage is a stock I'll continue to monitor for a more favorable buying opportunity.
Company Overview
Monster Beverage Corporation operates in the energy drink market. The company produces and distributes a variety of energy drinks, natural soft drinks, and fruit beverages. Brands include Monster Energy and Reign Total Body Fuel. The business model centers on selling these beverages to distributors, who in turn sell to retailers. These products can be found in multiple retail channels, including convenience stores and supermarkets, both in the U.S. and internationally.
In terms of competition, Monster competes with companies like Red Bull, Coca-Cola ( KO ), and PepsiCo ( PEP ). It's worth noting that Coca-Cola holds a minority stake in Monster, which facilitates certain operational synergies, such as distribution and marketing. In my opinion, Monster has managed to differentiate itself in a competitive market through its marketing strategies and product variety.
Energy Drink Market Growth
In my opinion, the energy drink market is on a robust growth trajectory and shows promising prospects for both existing and new market participants. According to a report by Grand View Research , the US energy drinks market was valued at approximately $19.5 billion in 2020 and is projected to grow at a CAGR of 8.4% from 2020 to 2030. This growth is fueled by multiple factors, including an expanding target demographic of young adults and athletes. Lifestyle changes and the demands of a fast-paced environment are driving the need for quick energy solutions, making these beverages increasingly popular. Companies are capitalizing on this trend by investing heavily in marketing and product innovation, introducing new flavors and formulations to attract a broader consumer base.
Grand View Research
The rise of e-commerce has also played a significant role in boosting sales by making these products more accessible. Strategic partnerships, such as the one between Monster Beverage and Coca-Cola, are enhancing distribution and market reach, further contributing to market growth. Additionally, emerging markets like India, Brazil, and China offer significant growth opportunities. Reports suggest rapid adoption rates in these countries, driven by rising disposable incomes, urbanization, and a young population. For instance, the energy drink market in China and India is expected to grow at CAGRs of 5.5% and over 9%, respectively, in the coming years. Overall, the energy drink market appears well-positioned for sustained global growth, with emerging markets playing a crucial role in this expansion.
Monster's Strategic Marketing and Market Share Growth
In my opinion, Monster Beverage Corporation's strategic marketing initiatives have been a key driver in its ability to gain market share, particularly in the U.S. carbonated drinks category. One of the standout aspects of Monster's marketing strategy is its association with famous figures, especially athletes. By partnering with high-profile sports personalities, Monster effectively targets its core demographic of young adults and athletes, who are more likely to consume energy drinks. These endorsements not only boost the brand's visibility but also add an element of credibility, making the product more appealing to potential consumers.
This marketing approach aligns well with the lifestyle and aspirations of Monster's target audience, thereby enhancing brand loyalty and encouraging repeat purchases. Given that Monster's market share by volume in the U.S. has grown from 0.1% in 2004 to 1.7% in 2021, as per Statista , it's reasonable to conclude that these marketing strategies have been effective in capturing a larger slice of the market. Coupled with the company's growth trajectory and the vast potential of the U.S. carbonated drinks market, Monster seems well-positioned for further market share gains in the foreseeable future.
Statistica
MNST Capital Allocation
In my opinion, Monster Beverage Corporation's capital allocation strategy is both strategic and growth-oriented, with a keen eye for opportunistic investments. A prime example is the company's recent acquisition of Bang Energy's performance drinks for $362 million . Notably, this acquisition was funded using cash from Monster's balance sheet, underscoring the company's prudent financial management. What makes this acquisition particularly opportunistic is that Bang Energy was entering Chapter 11 bankruptcy at the time. By capitalizing on this situation, Monster not only expanded its product portfolio but also potentially eliminated a competitor, thereby strengthening its market position.
The company's decision not to pay dividends and instead reinvest its earnings into growth avenues like R&D, marketing, and acquisitions aligns well with its long-term strategy to maximize shareholder value. Monster's partnership with Coca-Cola, which holds a minority stake in the company, further enhances its capital allocation strategy by providing access to a vast distribution network and operational synergies.
One of the most compelling indicators of Monster's effective capital allocation is its impressive Return on Invested Capital. Over the last 10 years, the company's ROIC has averaged around 30%, which is a strong sign of efficient use of capital to generate returns. This high ROIC suggests that the company's investments in growth are paying off.
DJTF Investments
In my opinion, Monster Beverage's share repurchase strategy has been a key component of its capital allocation, aimed at enhancing shareholder value. Over the past five years, the company has successfully reduced its number of outstanding shares from 1,199.64 million in 2016 to 1,061.07 million in the last 12 months. This represents a decrease of approximately 138.57 million shares over the five-year period. On average, the share count has decreased by about 27.71 million shares per year during this time frame.
To put this into perspective, the average annual percentage decrease in the number of outstanding shares over this period is approximately 2.31%. This reduction in outstanding shares is a strategic move that can increase earnings per share, potentially boosting the stock price and thereby maximizing shareholder value.
DJTF Investments
Financial Analysis
Over the past 5 years, the company has demonstrated remarkable financial performance. Its revenue has shown a consistent and strong growth, increasing from $3,807.18 million in 2018 to $6,691.11 million in the last 12 months in 2023, representing a compound annual growth rate ((CAGR)) of approximately 12%.
DJTF Investments
The earnings per share ((EPS)) has been equally impressive, growing steadily from $0.88 in 2018 to $1.35 in the last twelve months, reflecting the company's ability to translate revenue growth into bottom-line success.
DJTF Investments
The book value has seen a consistent upward trend, growing from $3,610.90 million in 2018 to $7,841.46 million, indicating a CAGR of approximately 16.8%. This suggests that the company has been successful in increasing its intrinsic value over the period.
DJTF Investments
As of the most recent quarter, the company reported cash and cash equivalents of $3,287.01 million . The company's total debt stands at $0; therefore, the business has minimal balance sheet risk. The company's current ratio, a measure of its ability to cover short-term liabilities with short-term assets, is 4.86, which is generally considered healthy.
Moving forward, I expect the company to continue to improve its fundamental, driven by secular tailwinds in the global energy drink market. I also expect MNST to continue to take market share through their strong brand and strategic marketing efforts. I also believe the management team will continue to be prudent with debt management was well as continue to allocate capital wisely within the business through reinvestment and share repurchases.
Valuation
When considering valuation, I always consider what we are paying for the business (the market capitalisation) versus what we are getting (the underlying business fundamentals and future earnings). I believe a reliable way of measuring what you get versus what you pay is by conducting a discounted cashflow analysis of the business, as seen below.
MNST’s current TTM Cashflow per Share as of Q2, 2023 is $1.27. Based off the reasons for growth mentioned throughout the article, I believe that MNST’s Cashflow per Share should grow at 14% annually for the next five years. Therefore, once factoring in the growth rate by Q2 2028, MNST’s cash flow per share is expected to be $2.45. If we then apply an exit multiple of 35, which is based off MNST’s historical mean price to earnings ratio for the previous 10 years, this infers a price target in five years of $93.93 Therefore, based on these estimations, if you were to buy MNST at today's share price of $56.37, this will result in a CAGR of 11% over the next five years.
DJTF Investments
While Monster Beverage is a fantastic business and the above valuation estimates an 11% CAGR, I do believe MNST to be a hold. I believe there are likely better opportunities available in the market. I also believe there is a minimal margin of safety available at current valuations as the above model relies on an exit multiple of 35, which could significantly contract if the growth slows down temporarily. Given these factors, MNST will stay on my watchlist, as I hope the market will eventually offer MSNT at a more attractive multiple in the future.
Conclusion
The global energy drink market is on a trajectory for significant growth, providing a favorable backdrop for companies like Monster Beverage Corporation. Monster has effectively leveraged athlete endorsements to boost its brand visibility and market share, demonstrating its prowess in strategic marketing. Additionally, the company excels in capital allocation, as evidenced by its impressive ROIC averaging around 30% over the last decade. Recent acquisitions like that of Bang Energy's performance drinks for $362 million further underscore Monster's growth-oriented strategy. However, despite the potential for an 11% CAGR based on current cash flow per share and historical price-to-earnings ratios, Monster's stock appears to lack a sufficient margin of safety at its current valuation. The model relies on an exit multiple of 35, which could contract if growth slows, making the stock a hold for now. Overall, while Monster Beverage presents a compelling business case, it remains on the watchlist for a more attractive entry point in the future.
For further details see:
Monster Beverage: Strong Fundamentals But No Margin Of Safety