After nearly doubling in price over the last five years, shares of top energy drink company Monster Beverage (MNST 0.24%) are getting ready to split. Management announced a 2-for-1 stock split during the company's fourth-quarter 2022 earnings update. Shareholders as of March 13, 2023, will receive one additional share for every one share they own, and the stock price will be halved to reflect the doubling in share count. The distribution and halved stock price will take place after market close on March 27, 2023.
Some investors might be excited to see a stock split like this, and interest in investing in Monster could make a comeback. But is this top beverage stock a buy?
Why a stock split anyway, and does that make a stock a buy?
It might seem strange that after over a year-plus bear market, a company would announce a stock split. However, Monster shares have performed quite well in spite of high inflation, aggressive U.S. Federal Reserve interest rate hikes, and fretting over recession. Shares are up 34% in the last year and are near all-time highs.
In fact, this isn't the first time Monster has split its stock during its epic 1,700% run-up since the start of 2007 (just before the Great Recession). The last stock split was a 3-for-1 divvy of shares back in 2016.
But why split a stock at all? There are a number of reasons a company might choose to do so, like making it easier to manage employee stock-based compensation or a stock buyback program. Monster has the latter -- it returns excess cash to shareholders via repurchases and retirement of stock.
One big reason, though, is that a "cheaper" stock price attracts lots of investor attention. However, it's important to note that a lower share price does not change a company's valuation. Think of shares of a business like slices of a pizza. If you cut all existing slices of pizza in half, you double the number of slices, but the size of the pie overall remains unchanged. Thus, it could be highly problematic buying a stock simply because of a recent or upcoming split.
The real reason you might want to buy Monster stock
If not a stock split, then why buy Monster? If you're interested in owning a steady growth story for the long-term, Monster might be your jam. Despite a highly competitive energy drink industry (including multiple entries from high-growth upstarts like Celsius Holdings (CELH 3.21%) over the years), as well as multiple economic downturns, Monster keeps grinding higher.
Data by YCharts.
Early in 2022, Monster also got itself into the alcohol business with the acquisition of craft beer outfit CANArchy for a small sum of $330 million. CANArchy has faced profit headwinds since then as Monster has been helping it expand its drink lineup. A flavored malt beverage called The Beast Unleashed was also, uh, unleashed on the market last year. Alcohol sales were a small $26.9 million in Q4 2022, but represent a potential new high-growth market for Monster.
Paired with inflationary pressures, Monster's profit margins (both GAAP net income and free cash flow) have fallen dramatically over the last two years. As a result, the stock trades for a high premium of 46 times trailing 12-month earnings, or 82 times trailing 12-month free cash flow.
Data by YCharts.
However, some of these cost pressures should begin to moderate in 2023, according to management. Overall, Monster's sales should continue to chug higher at a steady pace. And along the way, the company continues to repurchase stock ($707 million worth in 2022, about 1.2% of the current market cap). An exceptional balance sheet featuring $2.67 billion in cash and short-term investments and no debt is also a great bonus.
Monster could be a great addition to a portfolio for the long term, and not because of the stock price getting cut in half. Personally, I'm unclear on just how much profit margins will rally in 2023, so the valuation looks a bit high for my taste at the moment (the stock trades for nearly 30 times analysts expected one-year forward earnings).
Nevertheless, this is a proven leader in the beverage industry that has done right by shareholders for many years now. There's no reason to get excited about Monster Beverage simply because of a stock split.
