Description
Summary
Monster (MNST) is trading at an attractive valuation versus its history and peers because of concerns related to increased competition (Bang, KO Energy launch), future profitability/margins and the company’s relationship with KO. As a result, MNST is now trading at 25x 2020 EPS. This compares to 30x EPS on average over the last five years (~25x to 35x range). The de-rating is even more remarkable considering the general re-rating across staples and beverages (both KO and PEP are trading well above their five year average valuations).
The concerns listed above are real concerns but are well known and arguably reflected in MNST’s valuation and performance. MNST is +8% in the last 12 months while PEP and KO are +30% and +20%, respectively.
Fundamentally, MNST generates strong free cash flow and an attractive return on equity/invested capital. The company also has a net cash balance sheet. MNST should re-rate higher as investors begin to appreciate the continued resiliency of its business.
Variant Perception
MNST is able to successfully navigate this period of increased competition/uncertainty (as it has historically). For perspective, the company has grown EPS at a ~20% CAGR since 2007 despite persistent fears around competition, health/wellness impact and international margin pressure. Admittedly, Bang and KO Energy news flow will continue for at least the next three to six months creating a potential overhang but this is in part why MNST is trading at 25x EPS instead of 30x on average over the last five years.
MNST has faced various levels of competition in the past but Bang’s success is undoubtedly impressive and unprecedented. However, Bang’s market share has recently stabilized at 9%. This could be due to MNST’s Reign launch or simply because Bang has already tapped its easiest distribution. In fact, velocities are now declining. 5-Hour Energy share topped out around 12%. See below for Google Trends for Bang Energy:
Highlights
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MNST operates in a large and growing end market.
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The company generates a 30% return on equity.
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Capex is 2% of sales and MNST converts 70%+ of EBITDA into free cash flow.
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Strong B/S with $1.2 bn cash and no debt.
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High insider ownership.
KO energy/beverage outlook:
Valuation
MNST is trading at 25x 2020 EPS and growing EPS at a ~10% rate. This is relative to its approximate 25-35x range. This assumes minimal operating leverage and continued gross margin pressure. Gross margins are down 300-400 bps over the last couple of years due to inputs (aluminium), international mix and promotions and consensus is modeling this level forward (i.e. not assuming improvement). I’m not assuming a big recovery and much SG&A leverage given geographic/product mix headwinds and the likely need for continued advertising/promotion.
MNST still trades at a premium to consumer staples but the premium is now 30% versus 65% historically. The premium to beverages is now just 10% versus 50% historically (see below) despite higher organic growth, returns on capital and EPS growth.
As noted above, MNST generates an attractive return on invested capital:
The company has been a steady buyer of its stock over time and should continue to repurchase shares opportunistically given its free cash flow generation (almost 10% of cap in the next 2-3 yrs).
In summary, I think MNST is an attractive risk/reward given its current valuation relative to history/peers and negative investor sentiment. The key concerns and uncertainties related to competition, margins and KO should be better understood in the next six months. If not as negative as investors expect, the stock should re-rate higher.
Risks
Key risks include: ongoing margin pressure (e.g. international mix, higher promo spend), management succession, KO divesting its stake and regulatory/health developments. MNST’s valuation and consensus expectations partially reflects these concerns and uncertainties. On the KO relationship, I believe KO still values MNST as its energy partner (strategically and for equity income) and MNST does drive growth/profitability to the overall bottling ecosystem which is a positive for KO.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
US growth trend over the next three to six months, gross margins and KO's commitment to MNST/progress with its own energy product.