Monster Beverage (MNST) is a company with above-average revenue and earnings growth. This drove the stock to outperform the S&P 500 (SPY) over the past two decades. The stock has a good chance of continuing to outperform the broader market if revenue and earnings continue growing at above-average rates.
Monster’s stock tends to trade with an above-average valuation as investors bid up the price for the company’s strong fundamentals. I typically like to see above-average growth stocks trade with a PEG below 2 or between one and two. However, Monster’s PEG has been above two in 2020. So, waiting for a dip in the stock would be prudent. The current market correction may provide a better entry point for the stock.
Monster Beverage: Above-Average Growth to Drive the Stock
Despite the current high valuation, Monster is still expanding its reach globally. This is likely to act as a long-term growth catalyst for future revenue and earnings growth. Analyst estimates for the foreseeable future are projecting the company to grow revenue and earnings at an above-average pace for multiple years. Revenue is projected to grow between 6% and 7% for 2020 and then over 10% annually in 2021 and 2022. Earnings are projected to grow at 10% for 2020 and pick up to over 13% annually for 2021 and 2022.
Monster Beverage is continuing its growth through new product launches in various international regions. Various energy drink products were launched in 2020 in El Salvador, Argentina, Puerto Rico, Honduras, Guatemala, New Zealand, Spain, Romania, Switzerland, Austria, the Baltics, Hungary, Denmark, Poland, Nigeria, Ethiopia, Bosnia, Ghana, Romania, Croatia, Slovenia, Russia, Japan, South Korea, and China. Different energy drink products were launched to serve each specific market and specific cultural preferences.
Monster also plans on doing a strong promotion in India after the country emerges from lockdown in the 2nd half of 2020.
These global expansion efforts should help Monster increase revenue by selling more drinks. Expansion into emerging markets and regions that are not yet penetrated or underpenetrated can provide a long-term growth strategy for the company.
Exploring New Product Lines
The company has an ongoing innovation program to develop new energy-related drinks. Monster Beverage is also researching entirely new products in the non-alcoholic and alcoholic space outside the energy drink category. However, Monster did not announce any new drinks outside of the energy category yet. There has been ongoing research to determine what new products would make the most sense. New product lines can be another source of ongoing future growth for Monster.
Strong Cash Flow and Balance Sheet
Monster Beverage has a strong ability to invest back into its business for ongoing growth. This sustainability is a result of the company’s ability to generate strong cash flow. Monster generates 25.5% of revenue as operating cash flow and 18.5% of revenue as free cash flow.
Monster Beverage’s Free Cash Flow Growth
Source: Seeking Alpha
The company doesn’t currently pay a dividend. Monster uses its cash flow to reinvest in the business. The company gets strong returns on its investments as evident in the ROIC of 22.36%. This strategy of reinvestment drove the company to achieve its above-average growth, which influenced strong gains for the stock. So, what the company doesn’t pay in dividends tends to show up in the form of stock price appreciation.
The balance sheet is also strong with 5.3x more total assets than total liabilities and 3.5x more current assets than current liabilities. The company has $921 million in total cash and just $23 million in total debt. So, the company has no issue handling its long or short-term debt obligations. Monster is also in great financial shape for continued investments back into the business.
Many investors would probably run away with a quick glance at Monster’s valuation metrics. They are all at high levels. However, investors have to understand that Monster tends to maintain higher than average valuation levels over long periods of time. Investors tend to bid up the stock price for Monster’s strong fundamentals. The key metric that I like to use for high growth stocks is the PEG ratio.
Monster’s PEG is currently at 2.74. I think it would be worth picking up the stock if the PEG dropped below 2. I like the PEG because it takes into account the 3 to 5 year projected CAGR (compound annual growth rate) for earnings. A pullback for the stock price could bring the PEG down to a more attractive level for a long-term position.
Monster’s daily chart above shows that the RSI recently rose above 60 showing strength. The stock hasn’t reached an overbought level (above 70) yet. The green MACD line recently crossed above the red signal line which indicated a change in momentum from negative to positive. Money flow [CMF] has been increasing in October after the decline from the 2nd half of August. The stock also rose above the 50-day moving average – so it is possible that this could lead to further increases in the near term.
Ignoring the valuation and just looking at the technicals, Monster’s stock looks to have positive momentum to the upside. Short-term traders could try to profit from the next leg up to an overbought position and take profits when the RSI moves above 70. Long-term investors may want to wait for the next pullback.
Monster Beverage’s Long-Term Investment Outlook
Monster tends to have a good strategy for developing and marketing energy drinks. The company has many different types of energy drinks on the market. The company’s strong double-digit earnings growth is expected to continue for multiple years according to consensus estimates.
The strong estimates make sense since Monster continues to expand globally and achieves high returns on its investments. The company has a winning formula that can be multiplied by expanding in current markets and by tapping into new markets.
The company’s exploration and research in considering new beverages outside of the energy drink category can help drive additional long-term future growth.
The biggest risk for the company is competition taking market share away or making it challenging for Monster to increase its market share. However, the company has navigated the market successfully thus far. Of course, Monster can always adapt and change drink formulas and marketing to cater to the trends of the market.
A full investigation of the evidence suggests that Monster has a good chance of continuing its above-average growth over the next 3 to 5 years. If this happens, the stock has the potential for above-average increases. However, I would be more comfortable picking up the stock when the PEG ratio dips below 2.
The 2020s will see the transformation of the economy during the 4th Industrial Revolution. We are also running head first into a wave of demographic and debt driven problems that will need solving. A cautious, but forward looking approach, will be required to thrive in what could be a lost investing decade for many, much like 2000-2009.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: The article was written by David Zanoni for Kirk Spano’s Margin of Safety Investing service [MoSI].
Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.