Might Buffett Buy Monster Like He Did Coke in 1988?

As a value investor, I'm "supposed" to thumb my nose at stocks that have done well and that the analysts like. I'm "supposed" to always be always contrarian, the conventional thinking goes. 

I disagree (and, as we'll see, so would Warren Buffett). A value investor is supposed to look at a company and render a valuation independent of the prevailing consensus, whether it's bearish or bullish.

The fact that a stock is hated does not necessarily make it a great value (think of GM prior to bankruptcy). Similarly, a popular stock like Apple (a CAPScall of mine) is not necessarily overpriced (though I'd wager that as a group, popular stocks are less-profitable hunting grounds).

So when I look at Monster Beverage (Nasdaq: MNST  ) , a new CAPScall, I don't immediately discount it just because it is popular. And I think the Oracle of Omaha would agree with this assessment. 

When Buffett, via his famous holding company Berkshire Hathaway (NYSE: BRK-B  ) , bought his stake in Coca-Cola (NYSE: KO  ) in 1988 the stock was trading at 15 times earnings, or a 6.6% earnings yield. The company was earning returns on equity of 31% and had delivered returns of 18% per year to shareholders over the past five years.

That means Buffett bought the stock after an incredible 128% run-up. That's strike one against the stereotype that value investors only buy beaten-down stocks.

Monster Beverage today, by comparison, trades at 35 times earnings, or a 2.86% earnings yield. The company routinely earns 30%+ on its equity. Its stock is up 230% over the past five years. 

At first this makes Monster Beverage today look a lot more expensive than Buffett's Coke run in the '80s (that sounds so wrong, doesn't it?) -- but that would be ignoring one important factor: 

Interest rates. 

In 1988 a 30-year Treasury Bond offered 9%! Think about that -- a 9% return guaranteed by the U.S. government! And yet Buffett turned that down to buy Coke stock with an earnings yield of 6.6%. He had to be betting on lots of future growth to make the deal worthwhile (and he was right). This goes against another value-investor stereotype, that you never look to growth. 

Today a 30-year Treasury Bond yields a paltry 3.07%. Monster Beverage gives you almost the same thing (2.86%) but with hugely more growth potential (a bond's coupon never changes) and inflation-hedging. And the energy drink market is still in its infancy.

So in relative terms, Monster Beverage is likely as cheap, if not cheaper, than Coca-Cola was when Buffett bought it in 1988. 

The Power Of The Brand
Okay, I'm sure some of you are screaming at the screen "But Chris, Monster today is nowhere as dominant a brand as Coke was in 1988. It's like comparing apples and oranges!"

Oh really? 

Look what happened when Coke, Pepsi (NYSE: PEP  ) , and Dr Pepper Snapple (NYSE: DPS  ) tried to challenge the dominance of Monster and Red Bull in the energy drink aisle: Utter humiliation. When was the last time you saw someone drinking Venom (Dr Pepper), Amp (Pepsi), or Full Throttle (Coke)? Yeah, I thought so. 

Heck, sales of Coke's Full Throttle and Pepsi's Amp decreased in the fourth quarter year-over-year according to Nielsen. (Dr Pepper's Venom sales weren't even significant enough to break out.) Monster's sales were up 23.6% by contrast.

In fact, Coke's efforts to dethrone Monster and Red Bull have been so futile that Coke pulled Full Throttle Unleaded from the no-/low-calorie energy drink market. Meanwhile, Monster's new "Absolutely Zero" (in addition to the older "Monster Lo-Carb") variant continues to make gains and Red Bull prepares to launch "Total Zero." 

Within the energy drink sphere, in terms of units sold, Monster is number 1 and is rapidly catching up in total dollars to Red Bull. In convenience stores Monster is already #1 in both metrics.

And this is all without spending a single dime in traditional advertising!
Yes, I think Monster is a monster of a deal. So sue me, Ben Graham.

Fool contributor Chris Baines is a value investor. Follow him on Twitter, where he goes by @askchrisbainesChris' stock picks and pans have outperformed 93% of players on CAPS. He owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 01, 2012, at 6:51 PM, funspirit wrote:

    Monster has a done a great job branding red bull but Buffet will Not buy it. No way, good luck

  • Report this Comment On March 02, 2012, at 1:38 AM, cbaines2 wrote:

    I wasn't really making the point that Buffett will buy it (I agree he probably won't), but rather I was making the argument that the stock is cheap like Coke in 1988. (The title is somewhat of a misnomer.)

    Thanks for reading,

    Chris Baines

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