Jun 23, 2021
general Analysis
[9 min Read]
Valuation: Undervalued
$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:
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.
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:
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:
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.
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%.
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.