My first impression of Monster Beverage (Nasdaq: MNST ) , which got its start as Hansen Natural, was that the stock was wildly overvalued. It's hard to justify paying more than 40 times earnings for a beverage company that generates 95% of its revenue from the energy sodas space. That's a lot of Monster Energy cans in one basket. However, a healthy balance sheet with zero debt and plenty of cash to invest in growth signals a bright future for the beverage company.
Sip of success
First to catch my interest was the fact that Monster Energy products are flying off the shelf at a time when U.S. sales of sodas from big names like Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) have fallen to their lowest points since 1996. Another telling sign that Monster has struck gold is the horde of industry rivals currently flooding the market with alternative energy drinks.
Most recent is Starbucks' (Nasdaq: SBUX ) entry, a new line of energized concoctions made from natural juice and green coffee extract. The new energy drinks, dubbed Starbucks Refreshers, will hit grocers, convenience stores, and Starbucks locations next month. While we'll have to wait and see how this works out for the coffee retailer, other beverage companies have had little luck creating buzz for their respective energy offerings.
Competitors try and fail
Pepsi launched AMP Energy juice in a variety of flavors, while Coke promoted a mix of pick-me-ups including Full Throttle, Burn, and Gladiator in hopes of capitalizing on the $8 billion energy drink market. With this niche market set to reach $52 billion by 2016, it's not surprising that soft-drink players and coffee chains alike want in on the action. According to Beverage Digest, the thirst-quenching energy category grew 16% in early 2011, with Monster claiming 36% of the market.
Pepsi, Coke, and Starbucks own some of the world's most valuable beverage and snack brands. They also benefit from much larger marketing budgets than Monster. However, that hasn't helped them replicate Monster's success in the space. In fact, declining sales of its own energy drinks led Coke to a distribution deal with Monster, in which Coke now delivers nearly half of Monster's U.S. products.
This arrangement has led many investors to question whether Monster is a potential takeover target. For now, I don't see that happening. What I do see is a strong brand that will continue to be an industry leader in terms of growth.
Drink to this
Monster's stock more than doubled in the last year, and Bloomberg says the company is expected to amp up earnings by 70% to $803 million by 2015. Additionally, Monster boasts the highest operating margin in the industry. Energy drinks in general have higher margins than carbonated soda. But the company's success lies in its ability to expertly leverage its Monster Energy brand to drive sales.
Product innovation and international growth are also moving the stock forward. Monster kicked off product launches in Poland last month, and it will continue expanding into new markets throughout 2012. Only 20% of the company's sales came from outside the U.S. last year, which means there is plenty of room for further growth overseas. The company is also enlarging its brand portfolio to include products such as Rehab Tea + Lemonade rehydration energy drink and Peace Tea.
While I'm not a fan of energy drinks in general, Monster has made a believer out of me. I think it will continue to gain market share in the U.S., and I expect international expansion to boost future profits, as well. Monster Beverages has proven itself against industry leaders such as Coke and Pepsi to create a recognizable brand, which is why I'm drinking the Kool -- excuse me, the Monster -- and giving the stock a three-year "outperform" rating on my profile in Motley Fool CAPS.
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