Up 13% Since Its Latest Report, Monster Beverage Still Has Plenty of Room to Run

In this segment from Market Foolery, host Chris Hill enlists the help of Motley Fool analysts Aaron Bush and David Kretzmann to pore over the most recent results from Monster Beverage (MNST -0.55%).

Thanks in part to rising market demand, and in part to a critical deal with Coca Cola (KO 2.18%), the energy drink leader is getting its products into the hands of more and more consumers. Where will the company turn next to extend its incredible track record?

A full transcript follows the video.

This podcast was recorded on March 2, 2017.

Chris Hill: Shares of Monster Beverage up 14% this morning after strong sales in the fourth quarter. David, a lot of that is going to the bottom line, too. Just in terms of this latest quarter, their profits look good.

David Kretzmann: Energy drinks are hot sellers, and I think Monster still holds the honor of being the top performing stock over the past 20 years. I looked it up, any guess over the last 20 years how much that stock is up?

Hill: Wait a minute, I'm sorry, it's the number one stock for 20 years?!

Kretzmann: I know this was true last year, and based on the numbers I pulled up, I don't think there's any other stock that's overtaken that mark.

Hill: I can't even begin to guess.

Aaron Bush: 26,000%.

Kretzmann: 238,850% over the past 20 years.

Bush: What?! How? That's ridiculous!

Kretzmann: Right now, Monster is trading at about $48 a share. 20 years ago, it was trading at the equivalent of $0.02 per share, so just a couple of pennies could have but you a share. There have been numerous splits and stuff, but it's pretty incredible performance. Energy drinks have done wonders for the company and for investors who managed to hang on through that.

Bush: That's ridiculous. I don't follow this as close as David does, but I have to say, every time that I think that a company is decelerating for good, or that things are going to slow down, as soon as I think that, the next quarter they just reaccelerate all over again, and raise guidance. Coca-Cola.

Kretzmann: Yeah, that really is the story with Monster. A couple years ago Coca-Cola took a stake in Monster. Coca-Cola basically said, "We're done competing in the energy drink space. We're going to give Monster the few energy drink brands we have." And now, Coca-Cola owns about 17% of Monster. Over the past couple years, each quarter, Monster will transition over to Coca-Cola's bottlers and distributors. This quarter, they transitioned to Coke's distributors in Brazil, Costa Rica, Panama, so, increasing that Latin American presence. They launched in China, in a couple areas like Shanghai, Shenzhen, a few others. They're expecting to continue that expansion into China and India in 2017. So this is really a story of Monster getting their product in front of more people. Once they do that, whether is in Africa, the Middle East, Asia, Latin America, or even in the U.S., they manage to sell more. It's just a very attractive business model. Right now, they have $600 million in cash, no debt. They're producing well over $100 million in free cash flow each quarter. So it's just a very solid, high margin business. It's been incredibly well run by Rodney Sacks, who's been CEO since 1990. He's been a big piece for that incredible performance of the stock and the company. They also are trying to get into this super soda category. I hadn't realized that Mountain Dew commands a lot of presence and a lot of market share in that category.

Hill: What constitutes super soda? Highly caffeinated?

Kretzmann: It's highly caffeinated soda. It's not strictly an energy drink, it's not strictly a soft drink. It's somewhere in between there. It's just a little bit more radioactive, I guess. But Monster, late last year, they launched Monster Mutant, which really does look radioactive, it's this really food color-y green and red color. But apparently it's selling pretty well initially. Then, you also have lines like Java Monster, which is the coffee drink that competes more with the Starbucks prepared beverages.

Hill: For those of us who don't get enough caffeine in our coffee, we can just grab a Monster.

Kretzmann: And that's the thing. You would think that with health concerns and the headwinds against soda, you wouldn't expect energy drinks to be doing pretty well. But between 2011 and 2015, the energy drink category in the U.S. almost doubled. This is actually a category that continues to grow. You have those tailwinds behind Monster, they're trying to get more market share from Red Bull and become the dominant energy drink brand in the U.S. and the world. And now with that they have Coca-Cola's distribution model, that whole system, that should continue to play to their advantage. I think there are still a lot of reasons to like this company going forward.

Hill: And that's the thing. You think about Coca-Cola, which is, in some ways, the quintessential American brand. And yet, from a business standpoint, the overwhelming majority of sales of Coca-Cola products takes place outside of the United States. And when I look at Monster Beverage, and in this latest quarter, international sales make up just a little bit north of 25% of revenue. Even taking into account the gob-smacking stock performance over the last 20 years, I just look at that and go, "Wait a minute, is it unreasonable to think that they can double international sales?" No, I don't think it is.

Kretzmann: Yeah, at least. Looking over the next 10 years, I think you see those tailwinds behind Monster's back. Having Coca-Cola's whole distribution system, that should help accelerate that transition and that growth internationally for the company. And then, there's still room to gain market share domestically against Red Bull and some of the other brands that might be nipping at Monster's heels. So, yeah, I think there are still a lot of reasons to like where Monster can go over the next decade.

Bush: And one thing that stands out to me is, five years ago, their gross margin was in the low 50%. Now, it's in the mid 60s. I think a big part of that came when the Coca-Cola deal emerged, and all that distribution, leveraging all those costs, has really pushed up the gross margin. But because they're still in growth mode, not all of that yet has come through and shown in operating margins and free cash flow margins. Even if revenue growth tapers down, there is still going to be plenty of room for the earnings growth to pick back up and keep the stock moving forward, which is just fascinating to me.

Hill: Have you had it? I've never had one of their drinks, have you?

Bush: I have, yeah.

Hill: And?

Bush: It's a lot of caffeine. [laughs] 

Kretzmann: I don't drink the actual Monster drinks anymore, they're just a little too sweet and I'm like, this just can't be good for my body. But the Java Monsters aren't bad if you like iced coffee, it's pretty similar to a Starbucks frappuccino or something. So, I'll go with a Java Monster, maybe a couple a year, if that.

Bush: We have to try the super sodas, see if we change colors or something. [laughs] 

Kretzmann: See if we survive, yeah. You could probably run 10 miles after that.

Hill: One of the things I love about companies like this who are performing like this is, it just makes me smile for all the times that I hear analysts talk about the growth in organics. "Look at the health trends, we're all getting healthier!" It's like, not all of us are getting healthier.

Kretzmann: Monster is there to fill that gap, yeah, and they've done a good job at it.