Is Monster Likely to Outperform?

With shares of Monster Beverage Corporation (NASDAQ:MNST) trading at around $47.90, is MNST an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

MonsterC = Catalyst for the Stock’s Movement

Investors are concerned about earnings, especially since Monster Beverage has a tendency to miss expectations. These articles don’t bet on earnings in any way, shape, or form — they’re more about looking at the big picture. The only thing that will be stated in regards to earnings is that negative expectations may already be priced into the stock.

There are a few things some investors don’t know about Monster. First, the company’s margins are better than Coca-Cola’s, which is saying something. Second, the whole caffeine fear is overblown. If you want to know how much caffeine is in what you drink, then take a look at this chart: http://www.cspinet.org/new/cafchart.htm.

As you can see, Monster fits right in with the average cup of coffee. And the amount of caffeine in the average Starbucks (NASDAQ:SBUX) coffee is much higher than the amount of caffeine in a 16 oz. can of Monster Energy. Since it’s widely reported that caffeine is mildly addictive, it makes sense that Starbucks continues to exceed expectations, but that’s a story for another time.

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There is obviously some risk investing in a pure play like Monster, but there is also a lot of upside. When a company with strong growth and excellent balance sheet is getting bashed in the media, it’s usually an opportune time to buy. However, that doesn’t necessarily mean this is the case here.

Let’s take a look at the big picture for Monster.

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Monster is ideal. The balance sheet is excellent.

Debt-To-Equity

Cash

Long-Term Debt

MNST

0.00

$590.17 Million

$0

KO

0.97

$18.08 Billion

$16.52 Billion

PEP

1.30

$5.71 Billion

$23.73 Billion

 

T = Technicals on the Stock Chart Are Weak    

Monster has outperformed Coca-Cola and Pepsico (NYSE:PEP) over a three-year time frame. However, the past year hasn’t been as kind to Monster.

1 Month

Year-To-Date

1 Year

3 Year

MNST

-7.73%

-9.93%

-9.41%

150.33%

KO

0.50%

3.03%

9.72%

39.81%

PEP

4.31%

5.87%

8.69%

21.48%

 

At $47.90, Monster is currently trading below all its averages. This is uncommon in today’s market.

50-Day SMA

50.70

100-Day SMA

51.00

200-Day SMA

59.43

 

E = Earnings Have Been Consistent         

Earnings and revenue have been improving consistently on an annual basis.   

2007

2008

2009

2010

2011

Revenue ($)in billions

904.46M

1.03

1.14

1.30

1.70

Diluted EPS ($)

0.76

0.56

1.10

1.14

1.53

 

When we look at the last quarter on a year-over-year basis, we see an increase in earnings and revenue.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

474.71

409.96

454.60

592.64

541.94

Diluted EPS ($)

0.44

0.35

0.41

0.59

0.47

 

T = Trends Support the Industry

Energy drinks continue to take market share away from soft drinks. Skeptics say it’s a fad that won’t last, but they have been wrong for a long time. Energy drinks have shown double digit growth for many years. Other skeptics say there isn’t enough innovation throughout the industry, but it doesn’t require much innovation to offer an energy drink with caffeine, a cool name, and a neat-looking can.

Conclusion

There is certainly a lot of risk associated with an investment in Monster, but the rewards outweigh the risks. There aren’t many companies with strong margins, a stellar balance sheet, and consistent growth that have been beaten down this bad in such a strong market.

It might take a while for Monster’s stock to generate upward momentum again, but Monster is an OUTPERFORM.

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