Are Monster Returns Still Possible?

With shares of Monster Beverage Corporation (NASDAQ:MNST) trading at around $57.80, 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:

C = Catalyst for the Stock’s Movement

Is this stock running out of energy?

There are many opinions out there for Monster. However, there is one simple fact that must be taken into account. Energy drinks have been stealing market share from sparkling beverages, and Monster only trails Red Bull (private) in energy drinks.

Monster is elite when it comes to marketing. The following is a blurb of Monster’s on Amazon.com:

Tear into a can of the meanest energy supplement on the planet, MONSTER energy. We went down to the lab and cooked up a double shot of our killer energy brew. It’s a wicked mega hit that delivers twice the buzz of a regular energy drink. The MONSTER packs a vicious punch but has a smooth kick ass flavor you can really pound down. So when it’s time to unleash the beast within, grab a MONSTER and GO BIG!

Monster knows the market it wants, and it gets results. There has been an uproar that Monster markets heavily caffeinated drinks to kids, but there is no ad that specifically targets young kids. Monster simply understands that if late teens and young adults choose Monster, then it’s possible they will become loyal customers for many years to come.

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Starbucks has often been known as a place for people to relax, work, and socialize. The atmosphere is pleasant and classy. Monster has a hardcore image. Those who drink it might be found at a sporting event, a concert, or a party. Of course, people drink Monster for a boost even if they’re doing nothing for the day. The point is that it’s a different type of consumer than the one found at Starbucks.

For example, it’s not likely that you will find someone wearing khaki pants and a sweater, saying, “Good morning, Marcus. I’m going to make my way over to Starbucks for something sweet. It’s sure to spruce me up. Would you like to come along?” and then find that same someone in the afternoon dressed in jeans, sneakers, a t-shirt, and a baseball cap, saying, “What’s up, bro? I’m headin’ to the store for some Monster. You down?” They’re just not the same people. Since one image is classy, the caffeine content is rarely mentioned in relation to adverse health effects. Strange how that works, isn’t it? It’s almost political.

As far as company culture goes, it’s strong at Monster. Employees have rated their employer a 3.5 of 5, and 81 percent of employees would recommend the company to a friend. In addition to that, 70 percent of employees approve of CEO Rodney C. Sacks. Many of these employees are part-time. It’s not a bad gig if your day consists of driving a Monster truck, visiting college campuses, meeting models, and attending outdoor concerts.

Monster recently missed expectations (but sales increased). Monster has now missed expectations four quarters in a row. Other negatives include foreign currency transaction losses, legal expenses, and FDA interest in reviewing Monster products. Annual estimates have also been revised downward, but since this lowers expectations, it could be looked at a positive or a negative.

Morgan Stanley (NYSE:MS) recently rated the stock a Buy, stating that it’s undervalued. On the other hand, Jim Cramer stated that it’s a company on the decline, and that the whole category is slowing. Overall, analysts like the stock: 5 Buy, 3 Hold, 1 Sell.

The chart below compares fundamentals for Monster, The Coca-Cola Company (NYSE:KO), and PepsiCo (NYSE:PEP).

MNST KO PEP
Trailing P/E 31.65 22.46 21.59
Forward P/E 23.12 18.34 17.66
Profit Margin 15.66% 18.19% 9.33%
ROE 37.02% 26.59% 27.15%
Operating Cash Flow N/A 10.63B 9.87B
Dividend Yield N/A 2.70% 2.70%
Short Position 4.30% 0.90% 0.90%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Monster has performed exceptionally well over a three-year time frame. The past year has been poor, but there has been some strength year-to-date.

At $57.80, Monster is trading above its averages.

1 Month Year-To-Date 1 Year 3 Year
MNST 1.87% 9.41% -18.39% 196.5%
KO 4.45% 19.23% 14.77% 75.39%
PEP 5.30% 23.97% 29.27% 39.76%
50-Day SMA 54.35
200-Day SMA 50.54
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Monster is stronger than the industry average of 0.60.

Debt-To-Equity Cash Long-Term Debt
MNST 0.00 344.67M 0.00
KO 1.07 18.44B 35.12B
PEP 1.31 7.01B 29.40B

E = Earnings Are Strong

Earnings and revenue have steadily increased on an annual basis.

The latest quarter is not listed in the quarterly chart below. Q1 EPS came in at $0.37 on $484.2 million in revenue.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in billions 1.03 1.14 1.30 1.70 2.06
Diluted EPS ($) 0.555 1.105 1.14 1.53 1.86
Quarter Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012
Revenue ($) in billions 0.410 0.455 0.593 0.542 0.472
Diluted EPS ($) 0.3485 0.41 0.59 0.47 0.3857

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Consumers have been moving toward energy drinks from soda for years. There is also tremendous international potential. On the other hand, many legal threats are impeding growth potential.

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Conclusion

Monster has strong margins, quality debt management, consistently improving revenue and earnings on an annual basis, and huge international potential. However, there is no sustainable momentum in the stock right now. There are too many risks related to negative press (fair or unfair) that could lead to a gap down.

Monster is a good company, but for now it’s a WAIT AND SEE.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.

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