Potential for Monster Gains in Shares of This Beverage Giant

Monster Beverage (NASDAQ: MNST  ) is the fastest-growing major beverage company in the U.S. Along with Red Bull, the company has created and filled an increasing demand for energy drinks to the detriment of Coca-Cola's (NYSE: KO  ) soft drinks. Monster's stock garners a sizable valuation relative to earnings, but the company's high growth potential may warrant the premium. Compared to Coca-Cola, Monster actually appears cheap given its growth prospects. This could make it a good bargain for growth investors.

International markets key to restarting growth
According to Caffeine Informer, Monster and Red Bull are neck and neck in the battle for the top spot in U.S. market share. The two energy-drink companies account for 82% of the U.S. market, leaving the rest of the field no hope to place better than third. Monster's ascent to the top of the energy-drink market, combined with energy drinks' rise as a popular beverage option for teenagers and young adults, resulted in 1,900% sales growth from 2003 to 2013 -- a 35% compound annual growth rate.

Image credit: Monster Beverage

Now that U.S. growth is slowing -- Monster's 2013 sales increased just 9%, compared to 2012's 21% increase -- the industry is relying on new product introductions to gain incremental growth in the domestic market. Monster came out with a line of protein drinks, called Muscle Monster, and Red Bull has added new flavors to extend its brands. This type of incremental innovation may sustain modest growth in the years ahead, but the U.S. market is clearly maturing.

The story is different abroad. Monster has the potential to resume higher growth by replicating its business model in international markets. Monster's first-quarter international revenue accounted for 23% of total revenue, an identical proportion to the same period last year. However, the company plans to increase its presence in Europe, Asia, and Africa with launches in new countries in 2014 and is growing its share in countries in which it already has a presence.

Moreover, international markets still have a long runway for growth. According to Beverage Marketing, the average American consumed nearly 5 liters of energy drinks in 2010. By comparison, global per capita energy-drink consumption (including the U.S.) is now slightly more than 1 liter. Clearly, international markets have some catching up to do.

Since Monster's international operations will benefit from higher market penetration and increases in per capita consumption, overseas markets may sustain Monster's current pace of growth.

A relative bargain
Monster trades at 28 times analysts' estimates of this year's earnings. That's a high price-to-earnings multiple, but it may be warranted given Monster's growth prospects. By comparison, Coca-Cola trades at 20 times analysts' earnings-per- share estimates.

Investors can use the price-to-earnings growth ratio, or PEG ratio, to compare growth-stock valuations with mature-stock valuations. The PEG ratio simply divides the price-to-earnings ratio by the earnings growth rate. A higher PEG ratio indicates that investors must pay more per unit of growth than they would for a stock with a lower PEG ratio. All else equal, investors would rather buy a stock with a lower PEG ratio than a higher one.

Since it's difficult to gauge long-term growth at a high-growth company, it may be more useful to estimate Coca-Cola's growth rate and then figure out how quickly Monster needs to grow to match Coca-Cola's PEG ratio. Coca-Cola is a mature company that can sustain mid-single-digit earnings growth. Let's call it 6%. At this rate, Coca-Cola's PEG ratio is 3.3 (20 divided by 6). If Monster's PEG ratio were 3.3, investors would expect it to sustain 8.5% earnings-per-share growth for many more years (28 divided by 3.3).

Since Monster's international growth could propel double-digit earnings growth for several years, the energy-drink company appears to be cheaper per unit of growth than Coca-Cola.

Which style do you prefer?
Monster may have a lower PEG ratio than Coca-Cola, but that does not automatically make it a better investment. Monster's growth could be threatened by regulatory action related to product safety, and having a market opportunity abroad does not guarantee that Monster will effectively exploit it. Coca-Cola faces similar risks, but its established presence throughout the world gives it unmatched stability in the beverage market.

Your decision as to which stock is the better buy comes down to your investing style: Do you like to buy stocks with the potential to earn much more in the future, or do you prefer to pay only for today's earnings with relatively little hope of significant future growth? If the former, Monster is the better stock for you; if the latter, Coca-Cola suits you better.

Foolish takeaway
Monster's domestic growth is slowing down, but international markets present a long runway for future growth. Investors who don't mind paying a little more for today's earnings with a view toward tomorrow's growth may find Monster's shares attractive relative to Coca-Cola's. If the growth materializes, investors in the energy- drink company could reap Monster gains.

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