Yesterday, in my review of earnings for Inside Value selection Coca-Cola
The primary reason I cited was Coke's move to the No. 2 position in U.S. energy drinks. I'll fully concede that being No. 2 can often mean being a distant second. I wasn't trying to argue that Coke will steal Hansen's lunch in the energy-drink business, but that Coke and others have the ability to chip away at Hansen's potential growth. That's dangerous, considering the significant amount of growth priced into Hansen's shares.
Performing a discounted cash flow analysis with a 10% discount rate (generous, in my opinion), and giving Hansen Natural credit for its cash balances and lack of debt, reveals that Hansen has 15% annual growth priced in for 20 years, with 3% growth thereafter. Knocking the initial 20-year growth rate down to 10% and keeping the same terminal growth rate yields a share price of $25, about half what Hansen Natural sells for today.
It's true that Hansen has a much smaller base of free cash flow to start from than Coca-Cola, PepsiCo
To buy shares in Hansen today, you need to believe that 15% growth for 20 years is not only possible, but highly probable. That's not an assumption I feel comfortable with making for Hansen, and as a shareholder in Starbucks
I didn't buy Starbucks when it was at one of its peaks in valuation or share price, but I've held it through a few peaks and troughs. I can't say there's a perfect solution to holding a richly valued company, but investors need to be sure they understand exactly what is expected of the companies that they own. Hansen could be another Coca-Cola or PepsiCo, or it could be the next Snapple or Arizona Iced Tea. Paying a rich valuation to find out which company Hansen will become seems like a low-probability bet to me.
Coca-Cola is a Motley Fool Inside Value pick, while Starbucks was singled out for Motley Fool Stock Advisor . Try any of the Fool's market-beating newsletter services free for 30 days.
At the time of publication, Nathan Parmelee owned shares in Starbucks, but had no interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.