Valuation: Undervalued

Investing in Monster ($MNST) – A Leader in Energy Drinks

There is a big opportunity for non-alcoholic beverage companies’ post-pandemic, with the demand of beverages from restaurants resurfacing as they go back to full capacity.
- This can help beverage companies especially if they are able to maintain their current level of at-home sales.
Given my valuation techniques, and the valuations of analysts, there is a broad consensus that Monster beverages is undervalued and presents a good buying opportunity.
Based off of the plan that I formulated near the end of this report there is a potential upside to an investment in Monster of 14.13%.
- However, there are always risks to investments which are highlighted later in this report.

Company Information:

$MNST – Monster Beverages develops, markets, sells, and distributes their energy drink beverages under 32 different brand names, most notably Monster, Reign, and NOS.

For reporting purposes, Monster has 3 operating/reporting segments:

Monster Energy Drinks
Strategic Brands
Other Brands

AFF (American Fruits and Flavors) develops and manufactures the flavours for Monster’s drinks. After these flavors are perfected/approved, the recipes are passed on to third-party bottlers and packers. This means that Monster does not manufacture their own drinks, but they outsource them.

Investment Information:

Macroeconomic Outlook:

The beverage industry was heavily affected by COVID and the lockdowns that ensued. COVID forced restaurants, bars, bistro’s etc. to shut their doors, which meant that they would no longer need to be purchasing beverages from the beverage companies that the carry. This resulted in a massive decline in sales in this segment for beverage companies. However, some beverage companies offset this loss through exhibiting an increased number of in-home consumption/sales.

As we are starting to open back up the demand for beverages from restaurants will start to pick up as well, and hopefully return back to normal. However, it will be interesting to see if these beverage companies can still maintain a higher level of in-home sales than pre-pandemic times. If these companies can manage to do that and the demand from restaurants picks back up, they will be able to post great revenues and perhaps beat earnings estimates. If these companies beat these estimates than it is very likely that we see their stock price shoot up as a result.

Analysts are forecasting a bounce back once we start to reopen as well, as they have projected the non-alcoholic beverage industry will grow at a 6% CAGR over the next 5 years.

Sources:

COVID-19: Impact on food & beverage consumer products companies (deloitte.com)

Non-Alcoholic Beverage Market Growth, Size and Forecast to 2025 (marketdataforecast.com)

Segments:

Monster Energy Drinks: This segment consists of Monster’s Energy Drinks, Monster Espresso Energy Drinks, Monster Java Energy Drinks, Monster Coffee Energy Drinks, Monster Energy Teas, Monster Muscle, Monster Maxx, Monster Rehab and Monster Hydro. Furthermore, this segment also includes Reign Total Body Fuel, and Reign Inferno Energy.
Strategic Brands: This segment includes BPM, BU, Burn, Full Throttle, Fury, Gladiator, Live+, Mother, Nalu, NOS, Play, Power Play, Predator, Relentless, Samurai, and Ultra Energy.
Other Brands: This segment consists of AFF (American Fruits and Flavors) selling products to third-party customers.

Intellectual Property:

Currently, Monster beverages owns/in the process of owning over 14,200 trademarks worldwide on their beverage names, and the graphics/content on their packaging. Monster believes that these trademarks are an important part of their business as they will be able to pursue businesses who are using their product names without the authorization of Monster.

These trademarks are not advantageous to Monster based off of the fact that they can do something their competitors cannot, however these trademarks help them to uphold their brand name, and product names to their own standards and profit off of “copycats”.

Seasonality:

Monster has recognized that their sales are the best during the second and third quarters of each year. They have attributed this “seasonality” to the change in weather during these months. Their reasoning for this is when it is winter in countries that have large weather changes (ie. Canada) there is not as much to do and the weather may make it harder to buy their products.

Monster has also found that the seasonality of their energy beverages are not as volatile/variable as traditional non-alcoholic beverages.

Financial Information:

Financial Performance (Good): Monster has increased their revenues by 9.47% YoY, their gross profit by 8.14%, net income by 27.26%, decreased their effective tax rate to 13.3% (from 21.7%), and has a 59.2% gross margin. Monster had a great financial performance in 2020, and is very profitable, which should generate some excitement among investors, increasing the demand for their stock.
Financial Performance (Bad): Monster’s cost of sales increased by 14.13% YoY, which is worrying given that the cost of sales increased more than actual sales (hurts margins), their gross profit decreased from 60% (2019) to 59.2% (2020), this was a result of the cost of sales increase mentioned above. Additionally, Monster’s sales in quarter 2 of 2020 were down by about 1%, this is understandable due to the uncertainty with COVID during this quarter.
Outstanding Options: Currently, Monster has 8,323,000 shares outstanding in options that can be exercised this year. If all of these options were to be converted into common shares and sold on the market, it would cause a dilutionary effect of 1.57%.
RSU’s and PSU’s (Restricted/Performance Stock Units): In 2021, Monster will have 947,000 RSU’s and PSU’s to award to their employees. If all of these units are vested in 2021, then it would cause a dilutionary effect of 0.18%.
March 2020 Repurchase Program: In March of 2020, Monster’s board of directors authorized a share repurchase program, that would allow the company to repurchase $500M worth of common stocks. In 2020 Monster repurchased $58.5M worth of shares and have $441.5M left to repurchase shares in the future. If Monster was to use all of this money to repurchase shares (which they tend to do within the year), then Monster will be repurchasing about 7,905,103 shares (at $55.85/share, which is the agreed upon price). If all of these shares were repurchased, then the existing shares will rise in value by about 1.5%.
Employee Stock Purchases: Monster’s employees repurchased 200,000 shares in 2020, inflating existing shares by approximately 0.04%.

Analyst Coverage:

The low analyst estimate for Monster is $92/share, the average estimate is $104.11/share, and the high estimate is $118/share. These estimates come from 21 different analysts and I found this data via the Wall Street Journal.

Competition:

In order to undergo my comparable analysis, I had to find 4 companies that I could compare to Monster.

These companies needed to be public companies, with financial ratios and multiples that I could compare against Monster, have similar market caps (although this is not a priority in a niche industry in the stock market like energy drinks), operate in similar geographies, and have similar businesses/operations.

To best check off these items as listed above, I decided to choose the following 4 companies to compare: $KDP – Keurig Dr.Pepper, $CELH – Celsius Holdings, $FIZZ – National Beverage Corp., and $KO – The Coca-Cola Company.

Valuation Information:

WACC:

I was able to find Monster’s WACC through a website called TrackTak. This website has its own DCF calculator and estimated Monster’s WACC to be 7.37% in their models. I used their estimate in my own DCF as you can see my WACC is also this 7.37%.

CAGR:

I was able to arrive at my CAGR by taking the average yearly increase in Monster’s income over the past 4 years. By doing this I arrived at a CAGR of 19.78%, which I used in my DCF model.

Tax Rate:

I was able to find Monsters effective tax rate for the year 2020, through their SEC 10-K filing. In this filing they reported the tax rate to be 13.3%, which I used throughout my DCF model.

Investment Valuation:

In order to properly value Monster Beverages, I decided to undergo a DCF model, and 3 comparable analyses.

DCF:

To undergo my DCF model, I used the information found in the “valuation information” section of this report.

All said and done, my DCF model predicted that the fair value of Monster Beverages is approximately $54.88, which would imply that there is a 40.02% downside risk with this investment. However, this seemed to be a very large downside, so I decided to undergo some comparable to prove/disprove the valuation I reached through my DCF model.

Comparable Analyses:

EV/Assets:

By comparing Monster’s EV/Assets multiple to that of their competitors (found in the “competitors” section of this report), I arrived at a fair value of Monster of $141.80. If this was to be true, the upside of this investment would be 54.96%. This is very high, and contradicts the results found in the DCF model, thus I decided to undergo another comparable.

EV/Revenue:

By comparing Monster’s EV/Revenue multiple to their competitors, I found that Monster’s fair value should be $128.46, which would imply an upside to such an investment of 40.38%. Once again, this is very high and contradicts the results achieved in the DCF model. However, I decided to undergo another comparable to see If this high valuation was consistent among comparable analyses.

P/E:

By comparing Monster’s P/E ratio to their competitors I arrived at a fair value of $353.32, which would imply an upside of 286.10%. This is extremely high; however, it confirms that the comparable indicate that Monster is severely undervalued. In order to get one final valuation, I decided to take a weighted average of the result achieved through the comparable analyses.

Weighted-Average Comparable:

I assigned a 45% weight to the figures achieved in the EV/Assets and EV/Revenue multiples and assigned a 10% weight to the figure achieved in the P/E ratio. By doing this I arrived at a fair value of Monster of $156.95, which implies a share price increase of 71.51%.

Plan:

Any entrance into a position under the $92 mark helps to limit the downside, as it is below the low analyst price target.

If the price decreases below $87.75, I will exit my position and look for a re-entrance at the $78.33 level, and potentially even the $67.67 level if the prices dipped this much.

I will look to sell my shares if the price reaches $105/share, which is justified through my average result from both the comparable and the DCF model, and this level is also near the average analyst estimate.

Risks:

Financial Performance: Based off of their high valuation (when comparing their current price to the fair value I achieved in my DCF model), investors may be pricing in high earnings and growth. However, if Monster is not able to live up to this expected growth, then investors may dump their shares which will hurt the share price.
Share Dilution: As I stated in the “financial information” section of this report, Monster has a couple of different streams of potential share dilution. The main 2 forms of dilution in Monster are their outstanding options and their RSU’s/PSU’s, which can combine for a total dilutionary effect of 1.75%. This is not bad at all, as many companies exhibit way higher dilution, however it is something that investors should still pay mind to.

Catalysts:

Financial Performance: As previously stated, some investors may be pricing in good financial performance from Monster. However, if they are able to outperform these optimistic estimates, then their share price will soar. This can be seen through their Q2 2020 financial performance, as they beat earnings by a fair amount, and as a result their share price jumped by over 6.5%.
Share Repurchase: Monster has previously repurchased their shares, which is good to see as an investor. This is not expected to change anytime soon as monster has authorized $441M in share buybacks through their March 2020 repurchase program. Additionally, employees have the option to buy back shares as well. In total, Monster has the ability to repurchase over 8.1M shares, which will increase the value of the existing shares by 1.54%. This repurchasing can offset majority of the effects of their dilution and makes the share dilution less of a risk. This should help limit the risk for potential investors and entice them into entering a position.
Re-opening: Reopening could help Monster to drive their sales as it is likely that they will start to notice higher demand from restaurants as they start to re-open and reach full capacity. This increased demand can help Monster to grow their sales hugely if Monster can find a way to keep their at-home sales up.