This article is part of our Leap of Faith series, in which Foolish writers each pick a stock to take a chance on for the long term.
There's always going to be a bit of skepticism around any fast-growing stock. Sometimes the doubt is well-founded, and a company's momentum turns out to be running on fumes. But there are some that deserve their gains as a company continues to silence doubters and increase market share against fierce competition. For the past decade, Monster Beverage (Nasdaq: MNST ) , formerly Hansen Natural, has been such a company. I don't think its growth years are behind it, which is why I'm taking a leap of faith in honor of our quadrennial extra day and placing this company on my investing short list.
Growth with a buzz
The energy drink market grew at a roaring rate for much of the 2000s but slowed down a bit as a result of the recession and because of approaching maturity. Despite those headwinds, Monster beat its industry averages every year for the past five, earning an enviable rise in its stock price along the way.
Energy Drink Market Growth Rate
Monster Beverage Annual Revenue Growth
Monster Beverage Annual Stock Price Growth
Sources: News reports, Morningstar, and Yahoo! Finance.
Though some bears have been waiting for a slowdown, both Monster and the broader energy drinks category gained steam out of the recession. Because energy drinks are still a small slice of the broader beverage industry, there's still plenty of room left to run. Monster commands 34% of that slice, and recently squeezed past segment pioneer Red Bull to take the lead in convenience store sales.
It's been a two-horse race for years in this industry and Monster has risen quickly. PepsiCo's (NYSE: PEP ) Amp and Coca-Cola's (NYSE: KO ) Full Throttle are barely hanging on, combining for a small sliver of Monster's total sales. Coke might have thrown in the towel by signing a distribution agreement with its much smaller rival. Either way, it's good news for Monster to have that giant on its side.
Risks and threats
It wouldn't be fair to paint a rosy picture without at least noticing the warts. No growth stock is perfect, even after an incredible 10-year marathon paced at a constant sprint. What could cause this stock to crash?
Fool analyst Austin Smith feels like Monster (then Hansen) was a great company for existing shareholders, but echoes bearish sentiments about a segment slowdown. He also notes that weakness in Europe could also hinder Monster's efforts, and that continent is Red Bull's home base -- no easy fortress to assault. Monster isn't cheap, with a trailing P/E of 36.9. Forward estimates of a 24.8 P/E are hardly rock-bottom, but are also far from stratospheric.
Fool contributor Sean Williams isn't sold on that pricey valuation, and adds that the company also looks a bit too dearly valued at 10 times book value and 34 times cash flow. Monster isn't a dividend dominator like value investor stalwarts Coke and Pepsi, either. Of course, neither Coke nor Pepsi has managed a monster decade (pardon the pun):
In the same time frame, Monster has grown revenue by 1,750% and stock price by... well, a little more than that. That, of course, presents a problem as well. The larger the company grows, the harder it will be to maintain a breakneck pace. As the company builds a cash hoard, there's also a risk of boneheaded management decisions. A share repurchase program (not the first) seems like a poor use of hard-earned cash when there's so much more market to grab.
Comparing the up-and-comers
There aren't too many close competitors we can compare to Monster, since Red Bull is private. But how about SodaStream (Nasdaq: SODA ) or Green Mountain Coffee Roasters (Nasdaq: GMCR ) ? Like Monster, these companies are forging new beverage niches, but there are crucial differences beyond the business models. Both companies are actually valued slightly cheaper than Monster despite their potential, and both sport more optimistic forward growth estimates -- double Monster's five-year growth estimates in both cases.
But by making the machines that brew up custom concoctions, both SodaStream and Green Mountain run the risk of patent expiration. Green Mountain's imminent problem has brought heavy-hitting investor David Einhorn down on the bearish side, though the Fool's Rick Munarriz begs to differ with his analysis. Rick also points out that SodaStream's razor-and-blades model falls short by not patenting its syrup additives. Both companies are also at risk should a certain low-price retail colossus decide to push competing machines.
Monster's greatest strength is its simple retail business model and its proven brand appeal in a ferociously competitive market. No company becomes a Coca-Cola overnight, and even Coke had to fend off pretenders as it built its kingdom. Monster's a growth stock, but it's also that rare company that's become a top-shelf brand name in an industry that thought it had its Coke years ago. Based on Monster's growth rate, it might even claim the energy drink crown before too long. In the battle of brand vs. machine, I'll take the brand.
It's not a sure thing, but there's a ton of promise, and I think there's more room for this industry to grow than some give it credit for. That's why I plan to take a leap of faith and make Monster a part of my growth portfolio in the near future.
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See what other stocks are getting our Foolish writers to swing for the fences -- click back to the series intro for links to the entire series.