Monster Beverage: Merely Too Costly


Jack Taylor

Thesis

I’m bearish on Monster Beverage (NASDAQ:MNST) as I see the corporate’s inventory as overvalued. For my part, buying and selling at a P/E of near x40, the present market surroundings offers a lot better alternatives for traders to allocate capital. Notably, Monster Beverage inventory didn’t lose a lot worth YTD and thus outperformed the S&P 500 by about 20 proportion factors. I wish to view the present share value energy as a selling-opportunity and rotate capital into cut price alternatives, comparable to Victoria’s Secret (VSCO), Meta Platforms (META), or Volkswagen (OTCPK:VWAGY). I worth MNST inventory with a residual earnings framework, anchored on analyst consensus EPS estimates, and calculate a good implied share-price of $59.88.

About Monster Beverage

Monster Beverage is a shopper firm that develops, manufactures and markets vitality drinks. The corporate operates three main segments: Monster Power Drinks, Strategic Manufacturers and Alcoholic Drinks. Notably, Monster Power Drinks is about 95% of complete gross sales and Strategic Manufacturers accounts for the remainder. Alcoholic Drinks, as of 2021 doesn’t account for any noteworthy share of gross sales for the group. Geographically, greater than 60% of gross sales are generated within the North America Area and barely lower than 20% in EMEA. Asia Pacific and Latin America make up the remainder.

Rising revenues considerably above 10% CAGR for the previous 5 years, many traders regarded Monster Drinks as a world progress story. The corporate has shortly grown to say greater than 40% of the worldwide vitality drink market, solely barely behind Austrian-based Purple Bull. Accordingly, MNST share value jumped from about $6/share in early 2021 to greater than $90/share as of 2022. This represents a 1,400% complete return and 25% annualized.

Monster Beverages share performance

Searching for Alpha

Given these numbers, the corporate’s inventory has been awarded with a wealthy progress a number of. Accordingly, the corporate’s present > x39 P/E implies that Monster drinks growth is anticipated to proceed.

MNST valuation

Searching for Alpha

Valuation Forward Of Fundamentals

Nevertheless, I want to level out that Monster Beverage is buying and selling at an costly value. Particularly contemplating rising actual yields and falling asset costs throughout markets make MNST elevated P/E susceptible to a number of contraction. Furthermore, Monster Drinks’ margins are usually not proof against rising commodity prices and wage inflation. That stated, I see a situation of 30% a number of contraction together with a 15% EPS discount not as unlikely, which may indicate about 40% share-price draw back.

However even when there isn’t a EPS and a number of contraction it’s simple to point out that the market is significantly forward of analyst consensus. For reference, in accordance with the Bloomberg Terminal as of July fifteenth, Monster Beverage’s revenues in 2022, 2023 and 2024 are anticipated at $6.42 billion, $7.08 billion and $7.81 billion. This can be a CAGR progress materially beneath the corporate’s historic efficiency. Respectively EPS are estimated at $2.34, $3.08 and $3.53.

From 2018 to 2021, Monster Drinks elevated revenues from $3.8 billion to $5.5 billion, reflecting a 3-year CAGR of about 13%. Over the identical interval, EBITDA jumped from about $1.35 billion to roughly $1.85 billion (11% CAGR).

Monster Drinks is pretty much as good as debt-free with solely $34 million of monetary liabilities and greater than $2.7 billion of money and quick time period investments. In 2021, money offered from operations was about $1.2 billion.

Residual Earnings Valuation

Allow us to now take a look at the valuation. What could possibly be a good per-share worth for the corporate’s inventory? To reply the query, I’ve constructed a Residual Earnings framework and anchor on the next assumptions:

  • To forecast EPS, I anchor on consensus analyst forecast as out there on the Bloomberg Terminal ‘until 2025. For my part, any estimate past 2025 is simply too speculative to incorporate in a valuation framework. However for 2-3 years, analyst consensus is often fairly exact
  • To estimate the price of capital, I take advantage of the WACC framework. I mannequin a three-year regression towards the S&P 500 to search out the inventory’s beta. For the risk-free price, I used the U.S. 10-year treasury yield as of August 13, 2022. My calculation signifies a good required return of 8%.
  • To derive MNST’s tax price, I extrapolate the 3-year common efficient tax-rate from 2019, 2020 and 2021.
  • For the terminal progress price, I apply 3.5 proportion factors to replicate progress barely higher (ca. 1%) than estimated nominal GDP progress.

Primarily based on the above assumptions, my calculation returns a base-case goal value for MNST of $59.80/share, implying materials draw back of just about 35%.

MNST Valuation Residual Earnings

Analyst EPS Estimates Creator’s Calculation

I perceive that traders might need totally different assumptions close to MNST’s required return and terminal enterprise progress. Thus, I additionally enclose a sensitivity desk to check various assumptions. For reference, red-cells indicate an overvaluation as in comparison with the present market value, and green-cells indicate an undervaluation.

Sensitivity Table MNST Valuation

Analyst EPS Estimates Creator’s Calculation

Dangers To My Thesis

As a perform of valuation, I argue MNST is a Promote. Nevertheless, I acknowledge that Monster Beverage has confirmed a gentle track-record of topline progress and worth accumulation. Accordingly, the corporate may develop into its stretched valuation throughout the subsequent 12 – 24 months. If this have been to occur, and the valuation turns into “affordable,” I might flip extra impartial on the inventory.

Conclusion

Monster Drinks is little question a high quality enterprise. Nevertheless, the worth is just too excessive to justify an above-market return expectation for traders. Particularly since many shares are buying and selling cheaply in the intervening time, given the recession scare and progress decelerating, I argue traders can discover a lot better shopping for alternatives than MNST. As a perform of valuation, I provoke with a Promote advice. My goal value is $59.80/share.



Supply hyperlink