Monster Beverage: Monster Stock?

Monster Beverage Corporation (NASDAQ: MNST), previously called Hansen Natural Corporation, develops, markets, sells, and distributes alternative beverage category beverages in the United States and across the world. The company's Monster Energy brand (after which the company is named) is its flagship product line and accounts for approximately 91 percent of total sales.

Monster Beverage's stock has been soaring recently; it is up 58.7% YTD and 100.9% from a year ago. With the company's stock on such a tear, many worry that Monster Beverage has run its course and is starting to lose steam. Although this is a valid fear, there are several factors working in Monster Beverage's favor that could ultimately ensure the continued strength of the company. 
 
The Positives
 
Monster Beverage's Monster Energy drinks continue to sell extremely well, buoyed by strong demand. In fact, as chairman and CEO Rodney Sacks notes in the company's 2012 1Q financial results, the "energy drink category in general, and the Monster Energy® brand in particular, have continued their positive growth trends."

According to Gary Hemphill, senior vice president of the Beverage Marketing Corp., on a wholesale basis, energy drink sales climbed 45 percent to $4.37 billion from 2006 to 2010. In order to fully capitalize on this demand, Monster Beverage has expanded the Monster Energy product line, recently adding a fifth product to the Monster Rehab® line.

This expansion allows for diversification of the products, thus allowing it to appeal to a larger segment of consumers. It should also be noted that Monster Beverage has also increased its unit profit per case of energy drink sold to $2.84. This combination of sustained growth in demand as well as profitability should prove to be a winning formula for Monster Beverage in the future. 

Monster Beverage is also aggressively expanding into foreign markets and stands to benefit from establishing itself with large segments of untapped international consumers. Retail sales of Monster Energy® started in Hong Kong and Macau during April and in Japan and Ecuador in early May. International sales have been positive, with gross sales to customers outside the United States increasing to $100.6 million in the first quarter of 2012, compared with $72.8 million in the corresponding quarter in 2011. Monster Beverage is also planning on launching products in additional countries later this year and the company's expansion strategy should have a significant positive impact on its bottom line.

The Negative

The U.S. has recently been abuzz over Mayor Michael Bloomberg's proposed ban on large-sized sugary drinks at restaurants, movie theaters, and from street vendors in New York City. This new law, if passed, will prohibit the sale of sodas, pre-sweetened ice teas, and sugar-laced energy drinks larger than 16 ounces. Although Monster Beverages will not be directly affected by this ban since its beverages are sold in large 16 ounce cans, the objective of the ban, to get people to choose healthier beverage alternatives, may prove to be detrimental to Monster Beverage's energy drink sales in NYC. Moreover, if the law passes in New York City, it could potentially set a powerful precedent for the rest of America's cities, a development which, if effective in changing people's mindsets about beverages, could have an impact on Monster Beverage's bottom line.

The Results

Monster Beverage is in solid financial shape and has consistently posted double-digit earnings and sales growth. For the first quarter of 2012, Monster Beverage reported an EPS increase of 41% YOY, raising the average EPS growth of the last three quarters to 32%. For the current quarter, estimates are up and Monster Beverage is expected to post an EPS increase of 33% YOY. From a broader time range, we can see that Monster's 3-Year EPS growth stands at 36%. Monster Beverage has experienced 3 consecutive years of Annual EPS Growth and is expected to post a 2012 annual EPS increase of 33.33%.

In terms of sales, sales increased 28% YOY in the first quarter of 2012. Monster's 3-Year Sales Growth, meanwhile, stands at 20%. It should also be noted that Monster Beverage has strong profitability. The company's Annual Pre-Tax Margin is 26.8%, while its Annual ROE stands at 31.7%. Moreover, Monster Beverage has the highest operating margins in the industry and no debt.

The Verdict

Monster Beverage's strong earnings and financial performance have made it a hit with mutual funds. The stock has experienced 6 consecutive quarters of increasing fund ownership and saw a 3% increase in mutual fund ownership in its first quarter of 2012. Monster Beverage, overall, has significant factors, such as the continued strength in energy-drink demand and its internationalization strategy, that provide the stock with significant upside potential.