OK, it's a monster stock. It's up $7.50 a share (13.2%) from Tuesday's close in afternoon trading. At this morning's high -- a new all-time high -- the stock was up 19.5 times its closing price of just two years ago. What is it? It's Monster Energy Drink owner Hansen Natural (NASDAQ:HANS).
Look at these awesome third-quarter results. Net sales were double the year-ago quarter. Net income increased 249.1%. Is it any wonder the stock has been almost a 20-bagger in 24 months?
All the news is not good, though. Sales were lower for smoothies in cans, natural sodas, and Hansen's own line of energy and functional drinks.
The one (and only) analyst to follow the stock expected sales of $87.6 million and earnings of $0.61 a share. Sales came in at $105.4 million and earnings registered $0.83 a share.
Ah, but is this a stock you should buy?
Well, let's answer that question by noting that there are 22 million shares outstanding. That's a small float. Consider, too, that 24.2% of the stock is held by insiders. Yet over the past 10 days, the stock has traded an average of 1.2 million shares a day and sports an average volume of 748,000 over the past three months -- much higher than even the ordinary small cap. Suffice it to say, I don't think the buy-and-hold crowd is here. (At least, a cursory look at comparable stocks would lead me to believe this is the case.)
Like PepsiCo (NYSE:PEP) and Motley Fool Inside Value recommendation Coca-Cola (NYSE:KO), Hansen outsources the packaging and manufacturing of its Monster energy drinks. So, Hansen is a high-margin business.
But, there is competition. The giant in the fast-growing energy drink market is Red Bull. Also in this niche is Pepsi's SoBe and Coke-distributed Rockstar. The latter two have not been given a lot of marketing muscle, but with this business growing so rapidly, it's hard to expect the big boys to let this exploding opportunity go unchallenged.
So let's do a little math. If the company can earn $0.70 in the fourth quarter (a seasonally weak period, but a number I've upped from analyst expectations on the basis of the company's history of outperformance), diluted net income will be $2.53 a share in 2005. That gives the stock a forward price-to-earnings ratio of 25.4. Notch it down a bit to the analyst's expectation, $0.49, and we still get shares priced at 28 times earnings. That's fairly cheap for a company growing earnings as fast as Hansen.
Hansen's success is also causing cash to build up on the balance sheet. Total debt is less than $1 million, and cash (including short-term investments) increased from $21 million at the end of 2004 to $49.9 million at the end of September.
So Hansen Natural may be a day trader's plaything, but the company is showing it can make money in this market niche. Are energy drinks a fad? So far, that can't be verified. What is known is that Hansen is not the No. 1 player and that Coke and Pepsi have not yet tried to flex their muscles and capture market share.
For now, although the stock appears to be bargain-priced, investors would be wise to consider that the company and the relative premium awarded to the stock moving forward is related to the competitive threats, and their relative strength.
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Fool contributor W.D. Crotty owns shares in PepsiCo. The Motley Fool has a strict disclosure policy.
