Description

Imagine a company that makes juices and other beverages that is trading at 25 to 30x forward estimates. over 16x book value and more than 23x EBITDA. A company that has historically experienced relatively modest top and bottom line growth over the longer term. Then imagine that they have a faddish product that has recently been successful in a segment that is currently growing (by stealing share from other equally good offerings that are relatively undifferentiated - i.e. a fad) but that has been targetted by all the major players in the business, including Coke and Pepsi (Can anyone say "Clearly Canadian")

Hansens is a great short if ever there was one. In fact, thanks to very recent and relatively rapid top and bottom line growth over the last 12 months or so, HANS stock price has rocketed out of all proportion with the underlying business fundamentals. The stock is one of the best performers in the US market over the last 12 months (up some 400%). Over the same period of time, Sales for Q1 2005 were up to $60M (a 90% increase over the prior year). However, most of the performance has been powered by their hip energy drink brand called "Monster" On an annualized basis (from Q1), that would imply sales of $240M in 2005 (perhaps $280 if you take some more growth into account) versus $180M in 2004 and $110M in 2003. In effect, if everything goes great, sales are increasing at 50 to 60% versus a stock price that has increased 400% as animal spirits have taken over.

Based on the current stock price, the market is saying that the company is going to continue to grow at a very rapid rate for years to come. However, there are a number of reasons to believe that things will get harder as competition targets Monster more directly. In particular, Monster is taking share away from Red Bull (the category leader) in energy drinks (and they are not going to just lie down). More ominously, Coke recently started distributing a competitors brand called "Rock Star" and also has their own offering. Pepsi is also in the market and is quite capable and currently probably better managed. Needless to say, Coke and Pepsi both have the money, distribution, marketing savy, etc. to inflict significant pain on Hansens Natural.

Unfortunately, the company does not seem poorly managed. The managers pay themselves very reasonably (could even say it is low). Business model is quite capital efficient. The company is not overleveraged. At the right price (read much lower price) this might even be a good long. However, at the current valuation, the risk reward would seem to favor a stong downward move. Insiders were selling the stock in the 60s, but it continued to power upward (and recently thay have neither been sellers nor buyers). That having been said, the stock has shown some chinks in the armor over the last few days so that could be an opportune time to short.

As is often the case with most of the companies that I think are particularly compelling shorts, the stock is hard to borrow. I dont have many connections in stock loan and the company has a short interest ratio of about 20% so I am still trying to get some. As far as I have been able to tell, the security is not optionable, so buying a put is also not possible. Nevertheless, I believe it is available (at a cost) and some other members here may want to use their pull to get what they can.

Based on a more normalized value using P/S and P/B multples, company has at least 50% downside from current levels. If optimism is replaced by pessimism, 75% downside is easy to imagine.

Catalyst

Competition makes in roads, Fad dies out, growth slows.