Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
I can’t think of a bigger impact product in the past decade in the beverage industry outside of of “Energy drinks”. While there are multiple brands in this category, certainly the one of the 2 most ubiquitous is Monster Energy, which for many is like Xerox or Kleenex – a brand that defines a product. (Red Bull being the other) Bloomberg takes a look at the company, and it’s potential as a takeover candidate, despite a huge run in the stock the past few years.
- Monster Beverage Corp. (MNST)’s escalating profit from energy drinks pumped full of caffeine and nitrous oxide may tempt acquirers to chase what would be the most expensive takeover in the industry’s history. After the stock more than doubled in the last year, Monster Beverage is valued at 20 timesearnings before interest, taxes, depreciation and amortization, the priciest multiple of any North American soft-drink maker greater than $500 million, according to data compiled by Bloomberg that includes net debt.
- The $10.4 billion company, which got its start selling juices in the 1930s, has the highest operating margins in the industry and is projected to boost earnings 70 percent in the next three years, analysts’ estimates compiled by Bloomberg show.
- Coca-Cola Co. (KO) may be among interested buyers, said Credit Agricole Securities USA Inc. and Goldman Sachs Group Inc., to capture a bigger chunk of U.S. alternative beverage sales estimated to have reached almost $32 billion last year, according to the Beverage Marketing Corp. The Corona, California-based company could be worth $74 a share in a takeover, said Gabelli & Co., 24 percent more than last week’s close. Even without a premium, it would already be the highest Ebitda multiple on record for a takeover of a non-alcoholic beverages company greater than $1 billion, the data show.
- “What Monster’s so successfully done in the last few years is proven that demand for energy drinks is fairly universal among young people,” Caroline Levy, a beverage and household products analyst for Credit Agricole in New York, said in a telephone interview. “This business is now too big to ignore. If you’re a player in soft drinks, I think it’s very hard not to be in the highest-margin, highest-growth category out there.”
- Monster Beverage, formerly known as Hansen Natural Corp., sold juices and sodas under the Hansen name before introducing the first Monster Energy products in 2002 to capture growing demand for drinks made with added caffeine or supplements to deliver an energy boost. Monster brands, ranging from coffee- based Java Monster to its Nitrous drink injected with nitrous oxide, now account for about 91 percent of sales, according to the company’s most recent annual statement.
- Monster Beverage’s revenue climbed an average of 24 percent in each of the past five years, compared with average annual sales growth of 15 percent for Coca-Cola and 14 percent forPepsiCo Inc. (PEP) in the same period, according to data compiled by Bloomberg. Monster’s operating margin of 27 percent in 2011 was the highest among publicly traded North American soft-drink companies with a market value greater than $500 million, the data show.
- As Monster Beverage’s sales and profits have climbed, its shares have more than tripled in the past five years to $59.57 on March 9.
- Energy drinks — designed to deliver a mental or physical boost with ingredients such as caffeine, sugar and supplements — have gained in popularity in recent years along with other alternatives to traditional soft drinks. The segment was the fastest-growing category of the U.S. liquid refreshment beverage market in the five years ended in 2011 with a compound annual growth rate of 11.9 percent, according to data and estimates from Beverage Digest and Goldman Sachs.
- Monster and its main competitor Red Bull GmbH each account for about 30 percent of the U.S. market, he said.
- Coca-Cola, which has a market value of $157 billion, already distributes about half of Monster Beverage’s energy drinks such as Assault, Khaos and Rehab in the U.S. Acquiring the company would allow Atlanta-based Coca-Cola to tap earnings that Levy estimates will increase 20 percent annually over the next three years.
- “We have written in the past that we think it’d be a really accretive acquisition for Coke, but that was about $3 billion of market cap ago,” said Levy of Credit Agricole. “The irony is it probably still would be very accretive to Coke. Certainly where the big upside would be is that Coke can put energy drinks into its distribution system globally.”
- Monster Beverage may not be a willing target, said Mark Astrachan, an analyst at Stifel Nicolaus & Co. in New York. “I don’t believe management is out there actively trying to sell the business,” Astrachan said in a phone interview. “I don’t think that’s really a motivating factor. They’ve been incredibly successful in running the business.”
- Still, Anheuser-Busch InBev NV (ABI), the world’s biggest brewer, may be another logical bidder because it also distributes Monster Beverage’s products, Hong said.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
