Are you old enough to remember the cola taste-test commercials from the 1980’s? Average people were blindfolded, and then given nondescript cups of Coco-Cola and Pepsi and asked to taste each one and identify the one they preferred. It was a great gimmick, setting off debates among youth and adults alike about which of the two major cola brands were better.
Coca-Cola Company (KO) and Pepsico Inc. (PEP) are still the 500-lb. gorillas in the Beverages industry of the Consumer Staples sector, and they’ve battled for worldwide market supremacy for decades. They’ve one-upped each other at different points in time, but haven’t actually taken the same path to business growth. While KO has focused on its core competency, beverages, and generally established itself firmly at the top of the Beverage pile of stocks, PEP has diversified its business to become more of a Food Products company than Beverages alone. Brands like Frito-Lay, Quaker, and even branching into the restaurant business before spinning off Taco Bell, Pizza Hut and others into Yum! Brands (YUM) in 1997.
The Beverages industry is extremely mature, globally saturated and generally considered to be at a crossroads by most industry experts as consumer trends in non-alcoholic drinks seems to be shifting away from sugary soft drinks and more towards healthier juices. Both companies have made forays into those areas as well to try to keep up, but even so, it’s interesting to me that the two industry behemoths have spent so much time going after each other that the best investing opportunity in the industry comes not from the big boys but from a smaller competitor that has been growing aggressively and taking its share of the market from them. Monster Beverage Corporation (MNST) is the company I’m talking about, and while I’ll admit that in the past I’ve mostly dismissed them as another short-term, fad alternative to PEP and KO, I now believe the company is here to stay. KO seems to agree; they formed a long-term agreement with MNST that traded KO’s energy drink business for MNST’s non-energy products, and gave MNST access to their global distribution capabilities. While not all of the metrics line up to definitively label MNST a true value at its current price, there is still an interesting argument to be made. Take a look.
Fundamental and Value Profile
Monster Beverage Corporation develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle. The Company has three segments: Monster Energy Drinks segment, which consists of its Monster Energy drinks, as well as Mutant Super Soda drinks; Strategic Brands segment, which includes various energy drink brands owned through The Coca-Cola Company (TCCC), and Other segment (Other), which includes the American Fruits & Flavors (AFF) third-party products. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations. MNST’s current market cap is $30.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased almost 23%, while sales rose a little over 14%. Both numbers dropped in the last quarter, with earnings declining -14%, and sales receding a little more than -9%. MNST operated with a very healthy, stable margin profile, with Net Income that is 26% of Revenues over both the last twelve months and the most recent quarter.
Free Cash Flow: MNST’s Free Cash Flow is healthy, at $1.1 billion. That translates to a modest Free Cash Flow Yield of 3.69% that sounds unimpressive, but is inline with those offered by both PEP and KO, implying this is pretty normal for the industry.
Debt to Equity: MNST has no debt speak of, and about $958 million in cash and liquid assets. while PEP and KO both boast cash of between $6 and $12 billion, respectively, they also each carry at least three times as much long-term debt. The fact MNST has no long-term debt means that they can use their cash to focus on finding other avenues to keep growing their business while their bigger brethren worry about debt service.
Dividend: MNST does no pay a dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MNST is $6.53 per share and translates to a Price/Book ratio of 8.61 at the stock’s current price. That sounds high, but consider that both PEP and KO are currently trading more than 11 times their respective Book Values, and that puts MNST’s Book Value into a better context. While their historical Price/Book average is 8.68, suggesting that the stock is fairly valued right now, the stock’s Price/Cash Flow ratio offers an interesting counter-perspective, since it is currently running more than 50% % below its historical averages. I’m not sure that I’m willing to forecast a long-term target price of $100 or more for MNST, but that difference does put the stock’s all-time high around $70 in sight, offering a solid 25% discount.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s upward trend, which peaked in January of 2018 at around $70. The stock has struggled to establish a clear trend since that point, showing quite a bit of volatility between upper and lower extremes for almost the last year and a half. More recently, the stock hit a pivot hit at around $65 at the beginning of March before dropping back to support below the 38.2% Fibonacci retracement line at around $54. MNST looks like it is building some bullish short-term momentum right now, with its next most likely resistance probably around the 61.8% retracement line at about $60 per share. If the stock drops below current support, its next probable stabilization point is around $48.
Near-term Keys: MNST boasts the best overall fundamental profile of any of the major Beverage companies in the market right now. Whether or not they are rightfully considered a good value opportunity is a bit subjective, and depends on your view of their overall long-term prospects, but I think there is a strong argument to be made to say the stock should be able to reach its 2018 high around $70 in the long-term. If you prefer a short-term play, the stock’s current momentum seems to favor a bullish trade, either by buying the stock outright, or working with call options. If you prefer to play the bearish side, look for a push below $54 as an opportunity to short the stock or start working with put options with a near-term target price at around $48 per share.