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Analysts Debate: Is Monster Beverage Still a Top Stock?

Friday - 3/15/2013, 11:59pm  ET

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Monster Beverage , the largest publicly traded energy drink purveyor in the world.

Monster by the numbers
Here's a quick snapshot of the company's most important numbers:

Statistic

Result (TTM or Most Recent Available)

Market Cap 

$8.1 billion

P/E and forward P/E

26.2 and 16.4

Revenue

$2.1 billion

Operating margin

26.7%

Net income

$340 million

Free cash flow

$238 million

Cash and investments

$320 million

Sales by customer type 

  • Full-service distributors: 63%
  • Club stores, drugstores, mass merchandisers: 9%
  • International: 22%
  • Grocery, specialty chains, wholesalers: 4%
  • Other: 2%

Case sales (192-ounce cases)

  • 202.9 million

U.S. alternative* beverage market share

4.7%

Key competitors

  • Coca-Cola
  • Pepsi
  • Dr Pepper Snapple
  • Starbucks
  • Red Bull

Sources: Morningstar, corporate reports, Net Applications, and press releases.
* Includes ready-to-drink iced tea, lemonade, juice and fruit beverages, dairy and coffee drinks, sports drinks," natural" sodas, flavored sparkling beverages, single-serve water, and energy drinks.

Alex's take
I've had my eye on Monster for some time, but I found it to be too pricey an opportunity last year as its P/E soared toward bubbly territory:

MNST PE Ratio TTM Chart

Source: MNST P/E Ratio TTM data by YCharts.

However, now that investors have backed away -- a flight that began, contrary to what you may think, well before the legal challenges over several purported deaths -- Monster is starting to look a bit more palatable. With the exception of a brief period after the financial crash and in early 2010, Monster's valuation hasn't been this low in a decade. Is this an opportunity or the warning sign of a pending sales slowdown? While Monster didn't offer up any annual guidance for its 2013 fiscal year, we can extrapolate its growth rate from analyst estimates:

Year 

Revenue Growth*

Net Income Growth*

2009

11%

94%

2010

14%

1%

2011

31%

35%

2012

21%

19%

2013 (estimated )

13%

22%

Sources: Morningstar, Yahoo! Finance. * Year-over-year growth rate.

Monster can't keep up its monster (pardon the pun) growth rates forever. The energy drink segment is reaching maturity in the American market, according to a Nielsen report on a 13-week sales period that ended in mid-February. During this period, energy drink sales grew by 5.7% on a dollar-value basis, which is not that far ahead of Coca-Cola's 3.2% year-over-year revenue growth rate and comes in at less than half the 13.7% year-over-year revenue growth rate Starbucks posted from its 2011 to 2012 fiscal years.

However, Monster is one of the few energy drink purveyors to outpace its category's growth, as Nielsen reported an 8.1% year over year for those 13 weeks. Pepsi's AMP is fading fast, its sales down 17.6% year over year, but sales of Coke's NOS Energy (which is starting from well back in the energy drink pack) are up 11.7%. The energy drink market, at least in the U.S., is increasingly becoming a two-way battle between Monster and Red Bull, which increased its sales by 10.8% during this 13-week period.

Monster has one big thing going for it that Red Bull does not, and that's variety. A quick glance at Monster's expansive product list, outlined in its latest annual report, shows not only a wide variety of Monster Energy flavors and formulations but also two primary varieties of chilled coffee beverage, several juice drinks, an iced tea, and an energy-enhanced line of juice-based "Rehab" drinks. Monster classifies most of these as subsets of its energy drink segment, but many of these brands could be considered something else within the wider alternative beverage category -- and, as you'll recall from the earlier chart, Monster's relatively small share of that category still presents significant upside.

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