Energy drink veteran Monster Beverage (MNST -1.19%) is trading 14% higher year to date. That's a 49% rebound from the lows in March and the stock comes with pricey valuation ratios such as 35 times trailing earnings and 10 times the company's book value. Is Monster a buy at these high prices?
Monster is a beastly business
Let's start with the company's financial stability. Monster has $935 million of cash and short-term investments on hand and the balance sheet hasn't seen a nickel of long-term debt since 2011. It would take a long period of cash-burning market disruption to bring Monster to its knees.
I don't know about you, but I don't get a sense of impending doom from Monster's long-term sales and cash-generation trends:
What about COVID-19?
The long-term trend might not matter in the face of a game-changing global pandemic. The novel coronavirus certainly affected Monster's results in the spring of 2020. Foot traffic to gas stations and convenience stores dwindled when lockdown orders were issued in March. Large changes in consumer behavior in this crucial distribution channel can make a big difference to Monster's top and bottom lines. Convenience store revenues accounted for 72% of Monster's total sales in the fourth quarter of 2019.
Monster reported 12% sales growth in the quarter ending March 31, up from 10% in the previous quarter and 11% in the year-ago period. The strong performance came with the caveat that consumers and stores stocked up on household items such as energy drinks in the early days of the virus crisis. The second quarter was off to a bad start as energy drink buyers stayed home and worked through their stockpiles.
Based on soft sales in April and the market uncertainty that comes with the COVID-19 pandemic, CFO Tom Kelly said that the production and distribution pipelines around the world are working at full capacity with exception for bottlenecks in some smaller markets. The convenience and gas channel was indeed lagging in April but Kelly reminded investors that short-term market changes can be temporary.
"We reiterate that sales over a short period such as a single month or even two months should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period," Kelly said in the first-quarter earnings call.
That comment was made in early May. One month later, Monster held its annual shareholder meeting with a fresh update on the state of the energy drink market.
"According to the Nielsen reports, for the 1 week through May 16, 2020, for all outlets combined, namely convenience, grocery, drug stores, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 2.9% versus the same week a year ago," said CEO Rodney Sacks. "Sales of the company's energy brands, including Reign, were up 2.3% in the 1 week period."
Again, short time period should not be treated as long-lasting trends but it was good to see a return to year-over-year sales growth. And it's abundantly clear that Monster's general trajectory is pointed upwards for the long haul here. The second quarter may or may not be disappointing, but future investors will remember it as a mere speed bump either way.
Is Monster a buy, then?
Monster's long-term growth drivers are as healthy as ever. Energy drink sales continue to surge around the world. The company is gaining market share against arch rival Red Bull in many key markets. Monster operates in nearly 140 countries these days and is using its close partnership with Coca-Cola (KO -0.97%) to enter the remaining outliers one by one. Oh, and don't forget that Monster is open to trying new drink recipes. The workout-oriented Reign brand is the fastest-growing product line in Monster's portfolio right now and analysts expect the company to join the booming market for hard seltzer drinks before the end of the year.
Yes, Monster is trading at all-time highs right now. It's also a market leader in a red-hot energy drink sector, sporting industry-leading profit margins and sales growth. Monster has earned its skyrocketing share prices and is likely to continue rising for many years to come. I can only imagine one abrupt end to Monster's market-beating returns, and that would be Coca-Cola replacing its 17% ownership of Monster with a full-fledged buyout. Six of one, half a dozen of the other. Shareholders are still winning in that scenario.