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Hansen Natural Corp.
My Second Purchase of Hansen

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By pencils2
October 27, 2006

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Pencils Fund Purchase: Hansen Natural
Purchase Price: $33.40
Purchase Date: 10/26/06
Shares Purchased: 5
Commission: $6.95

Business

Hansen Corp. operates in the beverage industry with three segments: Energy drinks, natural sodas, and juice. Hubert Hansen and his three sons founded Hansen in 1935, and they originally sold their drinks to film studios and retailers. Hansen has been innovative over its 70 years of existence, as they were the first company to make shelf stable smoothies and juices, and they really revolutionized healthy drinks. They now grow primarily through their brands and subsidiaries, engaging in the development, marketing, sale, and distribution of their products in the U.S. and Canada.

Rodney Sacks, chairman and CEO of Hansen, has been with the company since 1990; and other key executives have been with the company since the 1990's. They are very experienced with the beverage industry, and I believe that is the main reason why they've gotten to where they are today.

Hansen's most well known brand is probably Monster Energy, the brand with the second-largest market share in the energy drink market, behind Red Bull (but Monster is furiously gaining, and is starting to become the lead brand in several states). Blue Sky is well known the natural soda segment, as well as the Hansen's brand. Juice Blast is common and quite popular with Costco, whom Hansen has done a partnership with to offer Juice Blast. Overall, business is strong for Hansen, last quarter Monster sales doubled and the company is starting to diversify out of the energy drink market, which at the beginning of the year equaled more than 70% of revenue.

Financials

Some quick financials:

Market Cap                           3.05B 
Employ­ees                            290
Shares Outstanding                   90.85M 
Float                                60.40M 
% Held by Insiders                   29.21% 
% Held by Institutions               74.70%  
Qtrly Rev Growth (yoy)               82.60%
Qtrly Earnings Growth (yoy)          85.00%   
Revenue (ttm)                        479.21M 
Gross Margin (ttm)                   52.43%  
EBITDA (ttm)                         148.91M 
Profit Margin (ttm)                  18.36% 
Oper Margins (ttm)                   30.04%
Return on Assets (ttm)               47.64% 
Return on Equity (ttm)               62.41%   
Net Income (ttm)                     87.98M 
EPS (ttm)                            0.899 
P/E (ttm)                            37.29 
P/S (ttm)                            6.17 
Total Cash (mrq)                     115.00M 
Total Debt (mrq)                     588.00K 


As I explained in the latest Pencils Fund update (http://boards.fool.com/Message.asp?mid=24725262), we can now get more business value with Hansen for less market value, because the price is below where I originally purchased it in April. Today, for less market value, Hansen has added $25 million of cash to the balance sheet, paid off more debt, increased margins, increased revenue and net income, sales are stronger, they finalized that partnership with Bud, overall many aspects of the business are stronger than six months ago. That is why I'm taking advantage of this opportunity today.

Hansen's next earnings report is November 1, and I expect it to be a good one. Let me explain. Last quarter, Hansen missed sales estimates by approximately .5%, but got spot-on with earnings estimates. I think if they meet EPS estimates exactly, they won't be treated as harshly, because the market has it "out of its system," so to speak. I think the only reason they'd be treated harshly on its results would be if they miss estimates, and I personally don't think that is likely. Analysts are expecting $0.38 EPS (last quarter the EPS was $0.28). What I'm saying is that I think the stock will go up after earnings, and that's why I reinvested today. If they aren't received well but the business still is in good shape, I'll continue to load up. I'll build this position up to $10,000 over time if I have to, I really believe in the long-term success of Hansen. But because of the more reasonable valuation, I think they'll be received well with their 3Q results.

We know Hansen isn't going bankrupt tomorrow, simply because of that superb balance sheet. It is a relatively safe investment in that regard, so as long as the business is still at least "together," I won't mind adding to the fund's current position.

What to Look For

-- Monster taking Red Bull's position - I won't be surprised if in the next year Monster takes the throne as the leading energy drink, because they are becoming increasingly popular in an already very competitive segment of the beverage market. In the latest annual report, I liked to see that Hansen is always looking for ways to make their product cases more flashy and exciting to draw in more purchasers. So far, I can't complain with the job they've done.

-- Acquisitions - I don't think Hansen will go real heavy on acquisitions right now, but there are many more natural drink companies out there that would fit with Hansen's business. I've been thinking companies along the lines of Crystal Geyser (who make the quite popular -- at least in my area -- Juice Squeeze drinks) and Arizona, both natural companies that are gaining more consumer awareness. I wouldn't be surprised, once the growth starts to slow, to see Hansen gain extra growth through acquisitions. As long as they are reasonably priced and good, solid companies, I wouldn't mind seeing it happen.

-- International expansion - I don't think people realize Hansen has gotten to this level by expanding only in the U.S. and Canada. I think they would do well internationally, and it might be something we see happen in the next five years, although I don't think it is real likely. But it is important to know that international markets are there.

Valuation

When I first invested in Hansen, the EPS was .6465, and from that point I expected 20% annual growth for the next five years, which is an average of $0.70 a year. If they meet estimates this coming quarter, they'd just need only 7 cents more to meet this. So, this is what I'm expecting: 40% annual growth from an EPS of .6465 and a P/E of 25 in five years:

.6465 * (1.40^5) * 25 = 86.93

That equals a gain of approximately 22% annually. My low and high scenarios follow.

Low, or doomsday, scenario - Annual growth of 17%, P/E of 17:

.6465 * (1.17^5) * 17 = 24.10

High/exceptional scenario - Annual growth of 45%, P/E of 40:

.6465 * (1.45^5) * 40 = 165.76

So far, I don't think 40% annual growth and a P/E of 25 is that unreasonable, but we'll see what happens as we go along.

Conclusion

I think Hansen is a bargain over the next five years at these levels, but I plan to hang onto this position for many more years to come. I love the experienced, excellent management, strong and improving financials, and the fact that they are gaining market share at a pretty fast rate. So far, I love what I see.

Best,

David K


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