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.
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.
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.
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.
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.
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