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Strong Worldwide Demand For Monster Beverage Does Not Offset A High Valuation (NASDAQ:MNST)

Introduction

Monster Beverage (MNST) has seen high growth from strong consumer demand worldwide over the past five years. The Monster Energy brands have become a staple in the alternative beverage world. With a revenue growth rate of 9% per year, Monster Beverage has been a monster. But all investments require an analysis of the valuation, and Monster Beverage is trading at a very high price. I believe that the risk-reward for Monster Beverage is not great at a P/E of 33.75x and a PEG of 1.69x, as the Monster brands become more solidified within the alternative drinks space as the rate of growth slows in the future.

Great Financials

Past Five Years Results

Monster Beverage Revenue BreakdownMonster Beverage Demand Per CaseSource: SEC 10-K’s

The company operates in two main segments, Monster Energy and Strategic Brands. The Monster Energy segment includes all Monster branded drinks as well as the Reign Total Body Fuel brand and earns revenue from selling ready-to-drink packaged energy drinks to bottlers and beverage distributors. The Strategic Brands segment consists of the various more affordable energy brands that were acquired from The Coca-Cola Company (NYSE:KO) in 2015. This segment earns revenue from selling concentrates to authorized bottling/canning companies for sale in by wholesale or retail.

Looking at the above charts shows that Monster Beverage has seen revenue growth of 9.06% per year. This growth is attributable to Monster Energy, which has grown at a rate of 9.14%, while Strategic Brands has stayed relatively flat. The underlying demand for Monster Energy branded drinks has been increasing consistently. This strong demand for the product can is shown when looking at the cases sold per year. Cases sold has grown at a clip of 10.32% per year, and from 2018-2019 grew by 9.22%. Demand for Monster Energy drinks has been strong over the past five years and has not slowed down.

Monster Beverages Operating Income & Net IncomeMonster Beverage Financial MarginsSource: SEC 10-Ks

This strong demand for the company’s products has flowed down to the bottom line too. Operating income over the last five years has grown at a rate of 9.43% per year, while net income has grown by 15.16% per year. This is due to increased demand throughout the world for Monster Beverage products and steady cost control. This steady cost control is seen by steady gross and operating margins.

Gross margins have been very solid and have not decreased past the 60% level. Operating margins have seen the same consistent trend. Due to the strong demand for Monster Beverage’s products, the company has been able to grow revenue each year, but on top of this, Monster Beverage has been able to keep costs stable. The result over the past five years has been very good bottom-line growth.

This Year

In 2020 so far, Monster Beverage has posted two quarters of results that have shown the same growth pattern as the last five years. In Q1, revenue was 12.3% higher than the prior year at $1.062 billion. This was from a 14% gain in the Monster Energy segment, offset by a decrease of 8.2% in the Strategic Brands segment. For Q1, net income grew by 6.6% to $279 million or $0.52 per share.

Q2 was worse, and COVID-19 did have some impact on the demand for the products. Revenues were down by 0.92% at $1.094 billion. Monster Energy grew just 0.8%, while Strategic Brands declined 24.7%. Net income still grew to $311 million, a gain of 6.46%. For the total six-month period, Monster Beverage did see good demand and overall growth. Revenue for the six months was higher by 5.13% to $2.156 billion.

Monster Energy has seen sustained demand as revenues grew to $2.02 billion, a 6.9% increase. Strategic Brands continued a downward trajectory with a 10.9% decline in revenue for the six months. Cases sold for the period totaled 232.6 million, a 5.3% increase from last year’s 220.9 million. Overall, Monster Beverage saw sustained worldwide demand for the core Monster Beverage products. This strong demand resulted in net income for the first half of the year of $590 million or $1.10 per share, an increase of 6.54%.

I expect that the demand for Monster Beverage’s products will be higher for the full year than last year. But the growth in percentage terms will be lower. I believe that a suppressed consumer around the world may spend less on alternative drinks than in previous years. If the world economy sees a quicker comeback than expected, Monster Beverage could return to more “normal” growth rates.

Balance Sheet Health

As of the most recent quarter, Monster Beverage has a current ratio of 3.51x and a quick ratio of 3.01x. This is very high liquidity for a company that has such a strong demand for its products but surely allows the company to meet any current obligations. The debt-to-equity is currently very low at just 0.23x. Altogether, Monster Beverage is very financially healthy, with strong revenue growth paired with high liquidity and low leverage.

Valuation Is Too High

Over the past five years, Monster Beverage’s stock price has seen an almost 13% per year gain. The current share price is around $81, far from the $44 per share in 2015. Using the 2019 EPS of $2.03, the company is trading at a P/E of 39.9x. Using a conservative 2020 EPS of $2.40, Monster Beverage still trades at 33.75x. The book value per share for Monster Beverage is $7.88, therefore trading at a P/BV of 10.28x. But this company is about the strong demand and growth it provides.

If we take two growth rates -15% and 20%- and calculate the PEG using the conservative 2020 EPS P/E of 33.75x, the company still seems overvalued at a 2.25x PEG for 15% growth and 1.69x PEG for 20% growth. Monster Beverages and the core brand of Monster Energy has been around for quite a while now, therefore, the growth the company has seen will taper off at some point. I am not saying that Monster Beverage won’t keep growing and having demand for the next five years, I am saying that as an investor, I do not believe the growth will be as high as in the past.

Conclusion

Monster Beverage has seen worldwide demand for its products over the past five years. This demand has powered top and bottom-line growth for the company. Over the past six months, Monster Beverage has seen continued demand and growth, although at a lower rate. I believe that the rest of the year should reflect lower demand from a struggling consumer during this weak economy. But my real issue with investing in this company is the current valuation.

With a P/E of 33.75x and a PEG of 1.69x using a 20% growth rate, I am not a buyer. I do not think the next five years will see the same strong growth as the past five. Monster Beverage is now a solidified brand amongst the alternative drink space, and will more than likely experience lower demand and growth rates going forward. Therefore, I’m not a buyer at the current valuation, as the company doesn’t offer the risk-reward profile I look for.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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