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.