2023-12-31 08:08:53 ET
Summary
- Monster Beverage Corporation has experienced impressive growth and profitability, outperforming industry peers and normalizing at a leading position.
- The company's success is attributed to quality product development, aggressive marketing, international expansion, and a loyal customer base.
- Economic resilience and scope for future M&A due to the lack of debt enhances long-term investor value.
- We expect a continuation of the current trajectory, through new customer wins, new products, and new markets.
- Despite being an expensive stock, we believe the price is justified if you expect continued growth, which we do.
Investment thesis
Our current investment thesis is:
- MNST's impressive growth trajectory has been driven by quality product development, aggressive (but intelligent) marketing, and international expansion.
- Demand is sticky, as the business has developed a loyal customer base and sells an addictive product.
- Margins are equally impressive, with scope for further improvement as increased scale is achieved.
- MNST is an expensive business but we believe it is justified based on its current performance. On a NTM basis, the company is only trading at a 25% premium to Coca-Cola, a stock it is outgrowing.
Company description
Monster Beverage Corporation ( MNST ) is involved in the development, marketing, sale, and distribution of energy drink beverages and concentrates worldwide.
The company operates through three segments: Finished Product, Concentrate, and Other. It offers a wide range of beverages, including energy drinks, iced teas, juice drinks, lemonades, coffee drinks, dairy drinks, sodas, and more. The company provides its products under numerous brands like Monster Energy, Java Monster, Juice Monster, Reign Total Body Fuel, NOS, and many others.
Coca-Cola ( KO ) owns c.20% of the MNST business, with its international bottler network providing services to MNST globally.
MNST acquired B ang's assets out of bankruptcy in 2023.
Share price
MNST's share price has performed tremendously well in the last decade, returning over 400% to shareholders. This return is significantly above the market, reflecting its outsized financial performance during this period and the strong sentiment around the business.
Financial analysis
Presented above is MNST's financial performance for the last decade.
Revenue & Commercial Factors
MNST has grown its revenue at an impressive 12% CAGR in the last 10 years, with only 2 fiscal years with growth below 10%. This illustrates the resilience of the MNST's current trajectory, with no evidence of a slowdown.
Business Model and Competitive Positioning
MNST's current business model is predicated on aggressive expansion through significant marketing spending and product development. MNST has developed a range of products, focusing on taste and supplement ingredients, targeting those looking for energy drinks and other retailed beverages. This, alongside intelligent marketing through social media (and other retailed methods), has allowed the company to differentiate its brands, generating customer loyalty and a cult following.
MNST is known for its aggressive and innovative marketing strategies. The company heavily invests in sports and music sponsorships, partnering with athletes, teams, and events to enhance brand visibility and engage with its target audience. Further, the company is entrenched in the gaming industry, partnering with streamers and content creators. This has allowed the business to develop high visibility among its core target market, with its quality drinks leading to a lucrative combination.
This approach has allowed the business to exploit its rapidly growing suite of products to expand overseas and nationally in the US, through an extensive distribution network (Wide range of channels). The company primarily sells to bottlers to expedite this process, although in some cases directly to retailers.
Despite the "Monster" brand being the core offering, and specifically the energy drinks, the business has focused on expansion into other segments, such as carbonated drinks, alcohol, etc. This allows the business to reduce its dependency on the energy segment and utilize its expertise to expand its addressable market.
Our view is that MNST is one of the best in the business for selling to consumers. Its market is extremely effective but it is backed up with a great product. Consumer conversion is strong and consumer retention is equally so.
Beverage Industry
According to Beverage Marketing Corporation, the US “alternative” beverage category is valued at an estimated ~$72.9bn, representing an increase of ~10.4% over 2021.
The wider beverage industry is known to be stable, with several large consolidators dominating the industry. This said, the industry has a long tail of national and regional brands that provide strong optionality for consumers. This has allowed entry to the market to be possible, although most brands that find success end up being acquired by the consolidators. MNST's primary peers are Red Bull, PepsiCo ( PEP ), Keurig Dr Pepper ( KDP ), and Coca-Cola.
The beverage industry is experiencing several trends that represent opportunities and threats to MNST.
The beverage industry has experienced general shifts in the demand for flavors, with very few products remaining popular for an extended period of time (Cola, Lemonade, etc.). For this reason, it is vital that MNST continues to innovate, as well as diversify across brands, as a means of maintaining its competitive positioning. MNST is critically focused on this, continually launching a large number of products. This is only of the main reasons growth has continued in such a sustainable way. Further, the business is of sufficient size that M&A should be used strategically to support the company's long-term objectives.
The increasing reliance on digital platforms and e-commerce has transformed the way consumers discover and purchase products. From a marketing perspective, MNST has done well in this regard, utilizing it to gain prominence. This can be expanded further to increase its direct-to-consumer retailing, reducing the cost associated with selling through a retailer and improving sales and margins. We see this as an area of primary focus for the business.
With increasing awareness of health and wellness, driven by greater social awareness, consumers are becoming more mindful of their beverage choices. This trend has led to a growing demand for healthier and functional beverages, including natural energy drinks and those with reduced sugar or caffeine content. MNST's response to this has been to launch various sugar-free options, which has supported its current growth, but the business remains susceptible to a downturn in the demand for caffeine.
Economic & External Consideration
Current economic conditions are encouraging reduced discretionary spending, as heightened inflation and elevated rates lead to a reduction in disposable income.
Our view is that energy drinks should be treated like other necessities, given many consumers are addicted and thus regularly consume the products. As a result of this, the expectation is for demand to be inelastic, which is observed when considering MNST's sales. Q3'23 sales were up 14.3%, reflecting resilience in the face of reduced spending. This said, consumers could choose cheaper alternative energy drinks but they are likely not, reiterating the sticky demand MNST has, even in a downturn. Evercore analyst Robert Ottenstein has found this to be a systematic characterization of the energy beverage segment.
Although we suspect continued economic weakness, we do not believe MNST will be materially impacted. The current growth trajectory will likely remain, potentially with some softening.
Margins
MNST's margins are impressive, with a GPM of 53%, EBITDA-M of 29%, and a NIM of 23%. Margins have fluctuated in the historical period, as has cash flow, due to a change in product mix and the impact of rapid expansion.
The impressive margins are a reflection of the economics of the industry. Product development can lead to highly lucrative IP (flavor), which alongside an effective market, can generate a cash cow and a minuscule marginal cost.
Further, given the stickiness of demand, MNST has been able to increase prices in response to inflationary pressures and to improve economics.
We believe further improvement will be possible, as inflationary pressures subside and the business continues to benefit from scale.
Balance sheet & Cash Flows
Despite the rapid increase in scale, MNST does not utilize debt to find its expansion. This is a reasonable decision given how strongly cash generative the business is. Said cash flows have been consistently strong across the historical period. This gives the business flexibility to raise debt if required, potentially to acquire businesses.
Distributions to shareholders have come through share buybacks, which have been quite erratic during the last 10 years.
Outlook
Presented above is Wall Street's consensus view on the coming 5 years.
Analysts are forecasting continued strong growth from the business, which given the historical trajectory, looks reasonable. The demand for beverages will remain strong and we believe MNST is positioned well to continually innovate.
Margins are also forecast to improve, at a rate we concur with, as gradual improvement and scale will drive incremental gains.
Industry analysis
Beverage Industry (Seeking Alpha)
Presented above is a comparison of MNST's growth and profitability to the average of its industry, as defined by Seeking Alpha ( 12 companies).
MNST's impressive financial performance is reflected in the above, with the company outperforming on both growth and margins. Its commercial positioning and brand value has propelled the company to global success, with new competitors unable to match the business in innovation.
Only Coca-Cola operates with a superior EBITDA-M, reflecting the rapid rise to superiority for MNST.
Based on this, we believe the company to be highly attractive relative to its peers, with no material financial weakness.
Valuation
Valuation (Capital IQ)
MNST is currently trading at 29x LTM EBITDA and 24x NTM EBITDA. This is a small premium on its historical average.
A premium is certainly warranted. Growth has remained strong despite the increased scale, new brands and flavors have been developed, and profitability is attractive. Most importantly of all, the company has developed a truly global brand with a range of highly successful products.
Coca-Cola and Pepsi are trading at 19/15x NTM EBITDA, implying a 25-58% premium. This premium earns investors significantly greater growth and superior profitability, although we do concede it is fairly punchy. On an LTM basis, this valuation looks concerning but we feel the NTM multiple is quite attractive and is sufficiently declining.
The key question is whether the growth story will remain, and we believe it will. With this in mind, a rapid multiples contraction will occur if there is no price action.
Key risks with our thesis
The risks to our current thesis are:
- Social action against energy beverages and/or caffeine. The criticism of energy drinks due to their health implications is valid, and further pressures from society could lead to negative actions by Governments or reduced demand.
- A slowdown in growth. Although we do not expect this to occur, the unwavering trajectory does increase the chances of MNST "hitting a wall". Investors risk getting in at the top in this regard.
Final thoughts
MNST is a high-quality business with few downsides. It is growing quickly, has high margins, has a strong product, and has a defensible market position. We expect further growth to continue and margins to improve. The stock is incredibly expensive but that's the price to pay for superiority.
For further details see:
Monster: Premium Business At A Premium Price