Monster Beverage (NASDAQ:MNST) is a significant energy drink market player. They are innovative, have strong brands, and have made strategic decisions such as partnering with Coca-Cola (KO) to create a wide moat. They rank high on all quality measures, including growth, profitability, and returns, and have maintained a strong balance sheet. Excluding unfavorable currency exchange rates (Argentina ~300% inflation rate) 1Q24 revenues increased by 12.6%. The company has a strong balance sheet with a net cash position, and we think the company will continue to perform well.

The Company

MNST primarily develops, markets, sells, and distributes energy drinks and concentrates. To a lesser extent, it is also involved in still and sparkling water and alcoholic beverages. They cater to different tastes, requirements, and preferences through their flagship brands including Monster Energy, Burn, Java Monster, Punch, Juice Monster and as of July 2023, Bang Energy drinks.

In FY23, 65% of its revenues were generated in the U.S. and Canada, 19% in Europe, the Middle East and Africa, 9% in Latin America, and 7% in Asia. Of its reportable segments, Monster Energy Drinks dominates with 92% of revenues, and the other three, strategic brands, alcohol, and others account for the remaining 8%.

MNST has carved out a dominant position in the non-alcoholic beverage segment. It strategically caters to the energy drinks market targeting niche subsections such as the younger generation looking for a quick boost in energy, sports pre-workout, performance and recovery drinks, dairy-based coffee + energy drinks, and wellness. It is one of the dominant participants with its main competitor Red Bull. Bang was acquired in July 2023. Celsius Holdings (CELH) is gaining ground, but is a much smaller participant. Though Celsius has clocked up impressive revenue growth of over 90% over the past five years, these are expected to moderate to approximately 30% over the mid-term.

MNST is backed by Coca-Cola, where KO bought a 16.7% stake in 2015. In 2022, PepsiCo invested $550m in Celsius for convertible preferred stock, equating to roughly 8.5% of total ownership.

Financial Overview

Revenues increased 11.8% in the first quarter of FY24. Its Monster Energy segment increased by 10.7%. The other smaller segments collectively saw increases of over 20%. Revenue growth is slower than the company’s long-term averages, and consensus also estimates growth to be around 10% for the medium term. Though the growth is slower, it is still expected to be higher than the energy drinks overall market growth. Depending on what marker research we look at, the energy drinks market is expected to grow between 5.9% and 8.5% over the mid-term. With MNST growing faster than the energy drinks market, they will be increasing market share.

If we look at the price Performance, MNST has underperformed the S&P 500 over the past year.

The company significantly outperformed when looking at a longer time frame.

MNST has grown revenues over the past 15 years at an impressive CAGR of 13.8% or about 13.3% revenue per share. This is significantly higher than S&P 500’s approximately 5.2% CAGR. This is reflected in the share price returns performance of 1,592% compared to the S&P 500’s 351%.

The company is also highly profitable and enjoys high margins. Gross margins are over 50% and the net income margins are in the low 20s. The gross margins are slightly lower than the long-term average, especially over the past three years when revenues grew faster than the long-term averages, but inflation-fueled COGS were higher.

The company has a strong balance sheet with cash and equivalents of $2.6bn and little to no debt. $659m was spent on share repurchase in FY23, approximately $2.75bn over the past five years and over $7.5bn over the past ten years. We expect the company to be highly cash-generative and with the lack of strategic acquisitions to continue prudently returning excess cash to shareholders. They have announced a repurchasing program of up to $3bn, to be financed with cash on hand and by taking on new debt. Taking on new debt does not pose a risk, but could make the balance sheet more efficient.

Stockholders’ equity increased 21.6% CAGR over 15 years.

Valuation

Seeking Alpha’s growth and profitability factors rank MNST highly. Also highlighted above, the price performance has been lagging recently, and momentum scores are low. The FY24 and FY25 earnings and revenue have been revised down, but both by less than 2%.

MNST is a quality company, reinforced by SA’s high profitability and growth scores.

Digging deeper into the lower valuation score, they are significantly higher than the sector averages. This can be easily explained by significantly higher growth and profitability than the sector averages.

The five-year average PE was 34.4x and given that MNST is expected to command high growth and margins, we would like to see the forward PE closer to these numbers.

The PEG ratio is the PE divided by its earnings growth rate. It is the amount of PE per 1% of growth. The historic five-year average non-GAAP PEG was 2.66. EPS growth is expected to be 16.5% for FY24. If we use the historic average PEG of 2.66 with expected FY24 EPS growth of 16.5%, we reverse out a PE of 43.9x. This is higher than the current PE of 30.5x, indicating the company should be trading higher.

Remaining conservative, the historic PE of 34.4x gives us an FY24 price target of $61.5.

For a target price one year from now, we can take 7 full months remaining for FY24 and 5 months from FY25. This gives us a weighted average EPS of $1.9. Using this with a PE of 34.4x provides us with a target price of $65.3.

Price to sales, EV/EBITDA points to MNST being approximately 15% to 20% undervalued.

Final Thoughts

MNST is a high-margin company with strong differentiated products and caters to various segments in energy drinks. They are already a dominant player in the high-growth segment, and their strong brands will ensure they can leverage their position and enjoy strong revenue growth over the mid-term. Distribution locked in with Coca-Cola increases its dominance long with high US convenience store channels.

Health awareness is increasing and it could hurt growth. MNST is mitigating some of those risks with a pipeline of branching out into ‘better for you’ products. Competition and a lack of innovation going forward are the two other risks faced by the company.

Warren Buffett:

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Given the current share prices and most valuation measures, we think MNST, a high-quality growth company trading at a discount and would recommend a Buy rating.