The holy grail of investing is to find multibaggers -- stocks that double or more in a relatively short amount of time -- before they surge in price. The key is to find a business with enormous growth potential that, for one reason or another, the market is not giving full credit for its bright prospects.
Monster Beverage (MNST +0.35%) is a perfect example of a stock with the potential to become a multibagger within a few years. The stock already trades 100 times higher than it did 10 years ago, but it is 23% lower than its all-time high reached in 2012.
If Monster can execute on three key factors, then it could easily turn into a multibagger all over again.
Monster faces litigation and regulation of its products
The biggest cloud over Monster's head is the pending litigation from San Francisco City Attorney Dennis Herrera. The lawsuit seeks to force Monster to reduce the amount of caffeine in Monster Energy drinks, place additional warning labels on its packaging, and stop targeting minors in its advertisements.
The lawsuit reflects sentiments shared by lawmakers that energy drinks may have dangerous health consequences for those who consume them. The Food and Drug Administration held an independent review panel last August to discuss the health hazards associated with the consumption of caffeine in food and dietary supplements. The panel's report, not yet published, will be a major indication of how likely litigation against Monster is to be successful and the extent to which regulators will clamp down on energy-drink manufacturers.
The most likely outcome is that Monster and its competitors will not be able to market their products directly to minors and will have to place larger warning labels on products. This outcome will hardly derail the growth that lays ahead.
International growth
The reason Monster was a 100-bagger over the last 10 years is that its revenue exploded from just $110 million in 2003 to more than $2.1 billion in the last four quarters. It already has a leading share of the U.S. market; it operates in a virtual duopoly with Red Bull. Now it is looking to grow abroad.
Monster has a growing share of many international markets. It has achieved a 31% share of the Japanese market -- similar to its share of the U.S. market. The company already has a 10% share in Great Britain, 21% share in Spain, and 17% in France. It is expanding in all directions: India, Croatia, Eastern Europe, and many parts of Africa.
By all indications, Monster will become a global brand enjoyed by consumers worldwide. International sales currently contribute only 22% of the company's gross sales, but will eventually eclipse U.S. sales if the company can follow in Coca-Cola's (KO +0.37%) footsteps to global domination.
Distribution partners
Perhaps the most important factor in Monster's explosive growth in the last decade is its reliance on third-party distributors. Monster does not manufacture or distribute its products, it merely markets them. This enables the company to grow rapidly with hardly any additional investment in tangible assets.
Unfortunately, there is still no such thing as a free lunch. Coca-Cola is one of Monster's most important distribution partners. The carbonated-soft-drink giant distributes 29% of Monster's products on a dollar-volume basis. Coca-Cola is critical to Monster's continued success, but it also offers competing products, the most successful of which is Full Throttle. Coca-Cola has a strong position in the arrangement and is in control of the terms when distribution agreements are signed. This puts Monster at a disadvantage.
However, there is another downside to third-party distributors that is often overlooked -- and Dr Pepper Snapple Group (DPS +0.00%) is a perfect illustration. Like Monster, Dr Pepper Snapple relies on third-party distributors in many of its markets. Observers of the third-largest carbonated-soft-drink distributor lament that the company's distributors are not taking care to maximize in-store displays and promote the company's brands. This may be why Dr Pepper TEN has struggled to meet sales expectations. Monster's distributors have the same incentives as Dr Pepper Snapple's distributors; therefore, the company may not be getting all it can out of its brands.
Bottom line
Monster has a brand and a distribution arrangement that have the potential for enormous growth over the next decade. If the company can escape burdensome regulation and diversify its distribution partners, then the stock could easily turn into a multibagger once again.
