NewAge, Inc. (NBEV) Valuation

In my original plan for NewAge, Inc. I was going to focus primarily on the financial numbers rather than products, but in just trying to understand what the company does, this article has gotten away from me. It is an unusual business. Rather than trying to summarize this unusual and complex company in my words, I will quote their FY20 10K:

We are an organic and healthy products company intending to become the world’s leading social selling and distribution company. We are a purpose-driven firm dedicated to providing healthy products to customers and inspiring them to “Live Healthy.” We commercialize our portfolio of products across more than 50 countries worldwide and strive to disrupt traditional markets with industry leading social selling tools and technologies. More than 75% of our revenue is ordered and fulfilled online with the products delivered direct to customers’ homes.

We compete in three major category platforms including health and wellness, healthy appearance, and nutritional performance. Within our category platforms, we develop and market a portfolio of science-based, functionally differentiated, and superior performing products and brands. We differentiate our products utilizing our patents, proprietary formulas and production process, and trade secrets and focus our functional differentiation using different combinations of:

• Phytonutrients and micronutrients
• Plant-based ingredients
• CBD
• Noni
• Clean/non-toxic ingredients

I included NBEV in the current survey of beverage companies because it is classified as "Beverage, Soft Drinks" in some databases, and when you do a survey, you would rather turn over more rocks, not fewer, when looking for gold. But NBEV is really a nutriceutical and health-conscious consumer products company, not a beverage company.

At the investor relations site there is a single investor presentation. On slide #5, they say, in a column titled "initial strategy", that they would have a "Portfolio of Healthy Functional Beverages" [bold in the original] sold and distributed via a "Differentiated Route-to-Market". What has changed is that they now want a "Portfolio of Healthy Functional (Brands)". This happened quickly, as they have acquired multiple large companies and then also disposed of a number of retail brands in the past few years. They have rapidly diffused their business into a large number of different product types, including:

• Limu seaweed-based (algae?) beverages (e.g. Blu frog, LIMU)
• Noni-based beverages
• skin care
• nutritional supplements 
• DNA testing and diagnostic kits (MaVie); they are big on "Predictive Genomics"

The company makes a number of health claims for its limu-based products, and provides links to PubMed journal articles on fucoidian substances. 

The company is also geographically dispersed, saying that they are in "more than 50 countries." The company fully believes in social media-based marketing and local independent agents (MLM?), and most revenue (80%+) comes from direct sales.

Financial Data

Data is from Macro Trends.

Year	Revenue	Oper Income	oper margin	Net Income	net margin
2020	$279	-$35	-13%	-$39	-14.0%
2019	$254	-$80	-31%	-$90	-35.4%
2018	$52	-$19	-37%	-$12	-23.1%
2017	$52	-$6	-12%	-$4	-7.7%
2016	$25	-$4	-16%	-$4	-16.0%
2015	$2	-$1	-50%	-$1	-50.0%
2014	$3	-$1	-33%	-$1	-33.3%
2013	$1	$0	0%	$0	0.0%
2012	$1	$0	0%	$0	0.0%

With acquisitions has come a lot of share dilution:

Year	Shares	EPS	Share Holder Equity	ROE	share growth
2020	96	-$0.41	$142	-27%	25%
2019	77	-$1.16	$92	-98%	67%
2018	46	-$0.26	$155	-8%	48%
2017	31	-$0.12	$53	-8%	63%
2016	19	-$0.19	$5	-80%	27%
2015	15	-$0.07	$0	-202%	88%
2014	8	$0.00	$0	225%	0%
2013	8	-$0.04	$1	0.0%	0%
2012	8	-$0.02	$0	0.0%

As you can see from the financial tables, NBEV isn't profitable, never has been profitable, and is volatile in part because it is constantly changing and re-defining itself. One possible route to profitability is that one of its many and varied products becomes a runaway success, even as the others struggle with losses. If that does not happen, then the company as a whole has unknown chances of making money in the future. We can't make any comparisons with KO, PEP, MNST, KDP, COKE, or FIZZ, because it is nothing like them. So far management has not yet shown what potential operating earnings they might generate. Without some way of estimating even prospective earnings or return on equity, we have no basis for generating a discounted estimate of cash flow, even one that computes an expected value instead of using a deterministic prediction. Hence, I have no valuation for NBEV, and therefore cannot determine whether its market price is above or below its value.

A few words about logistics. Beverages are heavy to transport, and a business model that involves shipping liquids, including possibly perishable liquids, through common carriers would appear to be working against distribution efficiency. Further, plant-based nutriceuticals would seem to work better when fresh, and that requires either very rapid distribution, refrigeration, or both. I didn't check product margins or prices, but this type of product might tend to command high prices relative to shipping costs, but if so, that limits the size of its market.

New Age Beverages's investor relations web site has SEC filings, press releases, and presentations; and it forces you to accept marketing cookies. At the SEC filings link you will find a Notification of inability to timely file Form 10-K dated 3/16/21, but then a 10K dated 3/18/21.

Monster Beverage Corp. (MNST) Valuation

Monster Company History

Starting as Hansen's in 1935, the history of Monster involves a kind of change of identity. It was a small regional company when it was bought by Rodney Sacks in 1992. After initiatives in 1996 and 1997 to create a competitor to Red Bull didn't sell as well as they liked, in 2002 they developed an energy drink they called Monster, and it took off, far beyond the success of their legacy soda business. In 2012 Hansen's changed its name to Monster. In 2015, Coca-Cola took over the legacy Hansen's soda and juice business and folded it into their VEB (Venture and Emerging Brands) business unit, in exchange for distributing the Monster product portfolio and making an equity investment in Monster. 

Monster is not the leading energy drink brand, as Red Bull has that distinction. Monster Energy and Monster Energy Zero Ultra have 15% and 5.8% of the U.S. energy drink market, according to Statista. Monster is distinct in the large size of its standard retail unit compared with Red Bull, something that hasn't changed since the emergence of the energy drink market. In the U.S. Rockstar, bought by PepsiCo in 2020, is third in market share.

Your Own Monster Research

If you don't already drink Monster or don't want to sample it, reading issues of The Red Bulletin magazine might help you get into the head of the target market (or at least what Red Bull thinks it is). Those outside the U.S. may have better insight into how well marketing and distribution efforts are working, since the U.S. market, though not saturated, is more mature, and the best growth opportunities are in non-U.S. markets, such as China.

Monster Beverage Corp's web site is very well done and straightforward. You will find full information on brands, press releases, earnings webcasts, investor event presentations, SEC filings and periodic financial reports, and insight into corporate governance. The brands links will take you to consumer-oriented product sites.

Financial History

Data is from Macro Trends. Amounts are in millions of U.S. dollars. Shares are in millions. 

Year	Revenue	Oper Income	oper margin	Net Income	net margin
2020	$4,599	$1,633	36%	$1,410	30.7%
2019	$4,201	$1,403	33%	$1,108	26.4%
2018	$3,807	$1,284	34%	$993	26.1%
2017	$3,369	$1,199	36%	$821	24.4%
2016	$3,049	$1,085	36%	$713	23.4%
2015	$2,723	$894	33%	$547	20.1%
2014	$2,465	$748	30%	$483	19.6%
2013	$2,246	$573	26%	$339	15.1%
2012	$2,061	$551	27%	$340	16.5%
2011	$1,703	$456	27%	$286	16.8%
2010	$1,304	$348	27%	$212	16.3%
2009	$1,143	$337	29%	$209	18.3%
2008	$1,034	$164	16%	$108	10.4%
2007	$904	$231	26%	$149	16.5%
2006	$606	$159	26%	$98	16.2%
2005	$349	$103	30%	$63	18.1%

Revenue is growing in recent years at about 10%. Operating and net income margins are excellent. It is notable that revenue grew about 9% in 2020 and earnings 27%, unlike KO, which saw significant reductions in revenue, and PEP, which had a slight shrinkage in earnings. Margins have increased over the past 15 years and Monster appears to be enjoying efficiencies at its current scale. Its margins compare well with those of KO and PEP.

Year	Shares	EPS	Share Holder Equity	ROE	share shrink age	book value
2020	535	$2.64	$5,161	27.3%	2.19%	$9.65
2019	547	$2.03	$4,171	26.6%	3.01%	$7.63
2018	564	$1.76	$3,611	27.5%	2.25%	$6.40
2017	577	$1.42	$3,895	21.1%	3.83%	$6.75
2016	600	$1.19	$3,330	21.4%	-3.81%	$5.55
2015	578	$0.95	$4,809	11.4%	-10.52%	$8.32
2014	523	$0.92	$1,515	31.9%	-0.58%	$2.90
2013	520	$0.65	$992	34.2%	5.28%	$1.91
2012	549	$0.62	$644	52.8%	1.96%	$1.17
2011	560	$0.51	$979	29.2%	-0.36%	$1.75
2010	558	$0.38	$828	25.6%	1.76%	$1.48
2009	568	$0.37	$585	35.7%	2.91%	$1.03
2008	585	$0.19	$436	24.8%	1.35%	$0.75
2007	593	$0.25	$422	35.3%	-0.17%	$0.71
2006	592	$0.17	$225	43.6%	-1.54%	$0.38
2005	583	$0.11	$126	50.0%		$0.22
			average ROE	31.1%
			std dev of ROE	10.8%
				total shrinkage	8.23%
				annualized shrinkage	0.57%

MNST is buying back shares at a rapid pace. Despite the injection of capital by KO in 2015 and bump in shares issued to KO, MNST has a net reduction of shares over the past 15 years, and in the last four years has been using cash to buy back two to four percent of their shares each year. Since MNST doesn't pay a dividend, this is presently the only way MNST returns excess earnings to shareholders.

The ROE record seems to indicate that MNST still has too much cash on hand, and is capable of operating on a leaner capital structure than it does presently. Since paying a PE of 36 for your own shares is a mixed blessing, perhaps a reluctance to part with too much cash is a sign of management prudence. 

Year	7 yr rev growth	7 yr net income growth	7 yr EPS growth
2020	10.8%	22.6%	22.2%
2019	10.7%	18.4%	18.5%
2018	12.2%	19.5%	19.4%
2017	14.5%	21.3%	20.7%
2016	15.0%	19.2%	18.2%
2015	14.8%	26.1%	25.8%
2014	15.4%	18.3%	20.5%
2013	20.6%	19.4%	21.1%
2012	28.9%	27.2%	28.0%

This table shows seven year moving averages of revenue and earnings growth. Previously torrential growth has calmed somewhat, but, as hinted before, MNST is enjoying efficiencies of scale that have resulted in earnings continuing to grow faster than sales. 

Valuation

I haven't said it before in this blog, but it feels like I'm repeating myself to say that getting an estimate of the long term earnings growth rate is critical to calculating what MNST is worth. At a basic PE of about 36, MNST is expensive if is growing at the analyst consensus rate of 9%. That PE would be appropriate for a company growing at 20%, but it's not doing that anymore. True, there are two stories to MNST: its U.S. growth rate (perhaps 7%), and expectations of international growth of 16 to 20%.

I looked at four scenarios:  pessimistic, optimistic, nominal, and consensus growth rates. All use a discount rate of 5%, but assume different growth periods, peak EPS, and different decline periods. For comparison, two variants that use a 3% discount rate representing an extended period of low inflation and low national economic growth are included as well.

scenario	base EPS	growth rate	growth dura.	growth rate from peak	dura. of post peak	disc rate	share value
pessimistic	$2.64	10%	10	-7%	10	5%	$57
optimistic	$2.64	15%	15	-4%	15	5%	$169
nominal	$2.64	10%	15	-5%	12	5%	$93
consensus	$2.64	9%	12	-5%	16	5%	$72
optim, mal	$2.64	13%	15	-4%	15	3%	$183
nomin, mal	$2.64	8%	15	-5%	12	3%	$98

To believe the optimistic scenario, you need to believe that international sales of Monster Energy and similar drinks will take off like the U.S. introduction of Monster did. To be somewhat sure of that belief, you will need to be there in perhaps a dozen different countries and experience the marketing and consumer take-up, on the spot. I don't have that data, so I can't recommend that scenario as the right one.

The pessimistic scenario doesn't change the growth rate much. Rather, it is comprises a short duration of growth, followed by a more rapid contraction of the business (or at least of EPS) ten years hence. I think MNST is better than that, but it's worth keeping in mind.

The nominal case nearly matches the current stock price, and it's a relatively modest set of assumptions for growth and duration. Does that mean MNST is fully valued, and should be sold? No. One year from now, EPS could be 10% higher, and if we re-do the valuation from that higher level and with the benefit of another year's wisdom, we might find that the prospective valuation at that moment is 10% higher. So there is some reason to expect that paying nearly full price now may still return 10% over short to medium periods in capital appreciation alone.

The consensus case has a slightly lower growth rate, a lower growth duration, but a longer lifetime post-peak. I think this shows that the market is likely already leaning into MNST's bullish case, and actual investor expectations are for more than 9% growth. I have right now one sell side report that uses a higher growth rate, for example.