Play Offense And Defense With A Monster


Play Offense And Defense With A Monster

If you are looking for a defensive, nearly recession-proof industry to invest, a favorite for Wall Street historically has been the beverage industry. This group has consistently outperformed during bear markets in stocks and economic recessions. For perspective, a standout recession-fighting example came from a little beverage idea that overtook the world. One of the few success stories during arguably the most destructive U.S. economic slide, Coca-Cola (KO) grew dramatically during the 1920s and survived the Great Depression of 1930s by expanding into overseas markets. Even as the economy shrank 25% and many companies went out of business, Coke remained extremely profitable. Against the stock market plunge of 80% in price between 1929 and 1933, Coca-Cola fell roughly 50%. The revolutionary idea of selling the same formulated drink all over the country, as cheaply as possible in a single serving, caught the fancy of consumers in sharply increasing numbers.

On the offensive side of thinking in late 2019, if you desire a company expanding at above rates with super-high profit margins, alongside an inexpensive “growth” valuation upfront, I have found the stock for you. Monster Beverage (MNST) currently holds a number of advantages vs. the typical S&P 500 business, in combination, for new investment. Given a bent toward consumer brand name, high “margin of safety” characteristics, Monster should be on your radar.

Monster Energy Cans

Source: Monster Energy Website

Monster Beverage: The New Coke Since 2009

Monster has reported solidly higher results in the energy drinks business against a challenging beverage industry backdrop for many years. The company sells a range of energy drinks, including Monster Energy, Java Monster and Worx Energy as its core offering. The rising popularity and acceptance of its initial consumer fringe energy beverages have been the key ingredients to significant investor gains. Monster’s hard-fought leadership position in energy has been the fuel for both consumers and investors since Monster Energy debuted in 2009. Over the last decade, the stock quote has risen from $7 to as high as $68 during 2018. This nearly +1,000% gain is on a par to the equivalent period Amazon (AMZN) and Apple (AAPL) stock performance the last 10 years, about +25% compounded annually!

Monster Beverage’s successful product growth strategy includes continually adding beverages through related business purchases and developing new flavors. The company has been expanding international operations in various markets rapidly, places like China, India, Africa and countries in the Middle East. Monster has also expanded its distribution network through its alliance with Coca-Cola’s bottlers globally. Overall, international sales jumped to 34% of total revenues in the just released third-quarter earnings statement from 28% last year. The company reported 11% sales and nearly 12% income growth year-over-year. Monster outlined an even stronger 14% rise in EPS for the three-month period ended September 30th compared to last year, after buying back considerable common shares during 2019.

Monster has one of the highest net profit margins of any blue-chip company, in any business field or industry in America. On the five-year graph below notice the 26% net income rate, after taxes, on sales is better than every other major diversified, brand name beverage businesses available to investors including Coca-Cola, PepsiCo (PEP) and Keurig Dr Pepper (KDP). If profit margins are an operating measure of effective management and consumer product demand, Monster Beverage is the best choice in perhaps the best industry to own as we near recession. Why worry about recession? The Trump trade wars, slowing economic growth globally, and the inverted U.S. Treasury yield curve from late 2018 to mid 2019 all highlight the increasing odds of an economic downturn soon.

Fundamental Valuation Getting Cheaper

Pictured on the graph below, the stock quote this week represented the lowest valuation of the underlying business in five years for new investment. The current trailing P/E of 29x is only slightly above the equivalent S&P 500 average of 23x earnings. I would mention S&P 500 year-over-year earnings are moving in reverse during 2019 and are projected by Wall Street analysts to be down for the third straight quarter. Using forward 2020 guidance and estimates, Monster’s 25x multiple on earnings is roughly similar to the 22-25 projected range for Coca-Cola, PepsiCo and Keurig Dr Pepper. Reviewing the 10-year average of trailing price to earnings and cash flow generation, since introducing energy drinks, Monster’s multiples are presently trading at a 15-20% discount to its recent past. Is now a good time to buy shares while the valuation is down?

Technical Momentum

Below is a 10-year price chart of Monster vs. peers Coca-Cola, PepsiCo, and Keurig Dr Pepper, plus the S&P 500 average large-cap company in the U.S. Whether reviewing price changes only or total returns including dividends, Monster has handily outperformed the beverage industry and overall economy since launching its energy drinks.

On the two-year chart below, notice the lack of serious selling highlighted by the ascending On Balance Volume (OBV) line and Negative Volume Index (NVI) indicator. Basically, these important technical momentum creations are not showing material selling on either up or down days. The stagnation in the stock price since 2018 may prove something of a respite, before operating gains force more buyers to appear. The stock price has not moved much since the 2015 high price around $50 and now represents an interesting “growth” play.

Final Thoughts

Is Monster the cheapest company I can find, or the fastest growing, or the most popular on Wall Street in November 2019? No, but it scores well on most valuation metrics thrown its way compared to beverage industry peers, especially when adjusted to rapidly rising operating results. As the stock price has languished for several years vs. a still growing operating business, its underlying worth keeps getting more interesting. Generating the highest after-tax profit margin in the consumer beverage industry, Monster’s above-average 10%+ growth rate can be purchased today in a similar valuation range as slower growth competitors Coca-Cola, PepsiCo, and Keurig Dr Pepper.

If you want help for your portfolio, why not consider adding a Monster? Buying the leading performance stock in one of the best defensive industries could prove a profitable decision for your net worth. “Growth at a reasonable price” can be a terrific buying philosophy for long-term investors.

The biggest risk to the Monster Beverage stock quote is a general U.S. stock market crash, in my estimation. Barring a sharp 20-30% slide in the S&P 500 into early 2020, Monster could easily drift higher to all-time highs above $70 soon. If growth rates rise from quickly expanding overseas business exposure, 15-20% income gains in 2020-21 could jump the Monster stock price above $80 next year. Any way you slice it, I am comfortable projecting solid outperformance of the S&P 500 over the next 12-24 months, either in an up or down market trend. I would be an aggressive buyer on a big market slide that pulls Monster under $50 a share in coming months.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MNST over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.