Oh, the joys of high-growth investing. Those stock charts can be veritable thrill rides. You have to stomach the occasional drop straight down -- or out into the great unknown. My favorite coaster, Hansen Natural (Nasdaq: HANS), just reported preliminary year-end results, and as a Hansen shareholder, I get a queasy feeling from some of the numbers.
First, let me note that this is another company undergoing internal accounting reviews, thanks to options-granting shenanigans. The review board hasn't reached a conclusion yet, but early reports indicate that the issue is one stray grant, awarded to a director after the grant expired. I'd take that sort of human error over the systematic abuse of the options system that was found at companies like Affiliated Computer Systems (NYSE: ACS) and Monster Worldwide (Nasdaq: MNST).
So, options accounting is the least of my problems with Hansen right now. The energy-drink market is so crowded these days, it's not even funny. Privately held Red Bull got the ball rolling many years ago, with an exciting product and fresh marketing messages. Then Hansen sprouted wings and took off and is now stealing market share from the pioneer as the clear No. 2 in the market. Beverage giants like Pepsi (NYSE: PEP), Coca-Cola (NYSE: KO), and even Anheuser-Busch (NYSE: BUD), with its somewhat strange caffeinated beer coolers, all joined the fray eventually, but they haven't been able to catch up to the two front-runners yet.
Hansen put up a strong sales finish to 2006, with 54.2% year-over-year revenue growth for the quarter and 73.5% for the full year. New distribution agreements with erstwhile rivals Anheuser-Busch and PepsiCo Canada are putting its energy drinks, like Monster and Lost, on the shelves of grocery stores and gas stations across the continent, with restaurants and bars soon to follow. So far, so good. The rapid growth story is still intact.
But the other attraction of Hansen has been a set of widening margins across the board. While we don't have any net income data for the past two quarters, it looks like gross margins have hit a glass ceiling, and operating margins have even started to drop a bit. Yes, the new distribution system plays a part here, as the company has to share some revenues with its partners and put out fresh marketing materials in the new locations it's reaching. I sincerely hope that's the whole story.
Hansen is also bulking up its inventory levels way quick, putting the brakes on its cash conversion cycle. Management says that it's intentional in preparation for an expected demand boost, as America is covered in lightly carbonated, highly caffeinated sugar water. Again, I can only hope that these people know what they're doing. Hansen is flush with cash, which is always nice, but that makes the timing of this slowing cash conversion wheel all the more inconvenient.
I don't mind the thrills and spills of investing in highly volatile stocks like Hansen. In fact, it's part of the attraction for me, as overblown fears can present truly fantastic buying opportunities. And if margins start to pick up again once the whole distribution network deal settles in for the long haul, with less aggressive inventory counts to follow, I'll be just fine with my position. But I'd like to see some daylight within the next three or four quarters so I can stop worrying about these issues. Peace out, dudes, and hit the next wave hard.
Further Foolishness:
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Fool contributor Anders Bylund is a Hansen and Coke shareholder but holds no other position in any of the companies discussed here. A season pass to Busch Gardens doesn't count, and neither do his addictions to Coke and Monster. And, yes, Hans is still his middle name for real. You can check out Anders' holdings if you like. Foolish disclosure is always refreshing.
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