Rating Update: Stock Rating D-Negative (10/11/19)-Monster Beverage Corp (MNST).

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BUSINESS

Monster Beverage Corporation, through its subsidiaries, develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates in the United States and internationally. It operates through three segments: Monster Energy Drinks, Strategic Brands, and Other. The company offers ready-to-drink packaged drinks, non-carbonated dairy based coffee and energy drinks, and non-carbonated energy shakes primarily to bottlers and full service beverage distributors, as well as sells directly to retail grocery and specialty chains, wholesalers, club stores, drug stores, mass merchandisers, convenience chains, food service customers, and the military; and concentrates and/or beverage bases to authorized bottling and canning operations; and ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, MNST is expected to continue to be a major Value Builder.

Monster Beverage has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Monster Beverage has a poor Appreciation Score of 25 but a neutral Power Rating of 55, resulting in the Negative Value Trend Rating.

Monster Beverage’s stock is selling well above targeted value. The current stock price of $56.30 compares to targeted value 12 months forward of $42.
Monster Beverage’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
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Monster Beverage has a Power Rating of 55. (This neutral Power Rating indicates that MNST’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been neutral. Offsetting factors are is in a slightly weakened position current; and earnings estimate behavior for MNST has been slightly negative recently.

INVESTMENT PROFILE

MNST’s financial strength is exceptional. Financial strength rating is 100.
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Relative to the S&P 500 Composite, Monster Beverage Corp has moderate Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that MNST is extremely low risk. All factors are relative strengths. MNST’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. MNST has high market capitalization.

CURRENT SIGNALS

Monster Beverage’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

Monster Beverage’s current technical position is very strong. The stock price is in a 3.0 month up move. The stock has appreciated 24.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Marginal negative changes in Monster Beverage Corp (NASDAQ: MNST) fundamentals have recently occurred: significant quarterly sales deceleration occurred.
The stock is currently rated D.
Monster Beverage Corp (NASDAQ: MNST) stock closed at $3.23 on 10/11/19 after a major decline of -10.3%. However, this decline was accompanied by below average trading volume at 78% of normal. The stock has risen 1.2% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, Monster Beverage experienced a significant decline in cash of -$243 million (-20%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$1,341 million. Non-operating sources contributed +$10 million (+1% of EBITDA). Cash taxes consumed -$300 million (-22% of EBITDA). Re-investment in the business amounted to -$16 million (-1% of EBITDA). On a net basis, debt investors received -$0 million (0% of EBITDA) while equity investors removed -$1,277 million (-95% of EBITDA).
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Monster Beverage’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Monster Beverage Corp Peer Group as well. In most years, Monster Beverage was in the second quartile and top quartile. Currently, Monster Beverage is slightly above median at +1% of EBITDA (+$10 million).

Monster Beverage’s Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Monster Beverage Corp Peer Group. In most years, Monster Beverage was in the lower quartile and third quartile. Currently, Monster Beverage is substantially below median at -22% of EBITDA (-$300 million).

Monster Beverage’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Monster Beverage Corp Peer Group. In most years, Monster Beverage was in the top quartile and lower quartile. Currently, Monster Beverage is upper quartile at -1% of EBITDA (-$16 million).

Monster Beverage’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Monster Beverage Corp Peer Group as well. In most years, Monster Beverage was in the third quartile and second quartile. Currently, Monster Beverage is slightly above median at 0% of EBITDA (-$0 million).

Monster Beverage’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Monster Beverage Corp Peer Group. In most years, Monster Beverage was in the lower quartile and top quartile. Currently, Monster Beverage is lower quartile at -95% of EBITDA (-$1,277 million).

Monster Beverage’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Monster Beverage Corp Peer Group. In most years, Monster Beverage was in the top quartile and lower quartile. Currently, Monster Beverage is substantially below median at -18% of EBITDA (-$243 million).
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Monster Beverage’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Monster Beverage Corp Peer Group as well. In most years, Monster Beverage was in the lower quartile and second quartile. Currently, Monster Beverage is lower quartile at +25%.

PROFITABILITY

Monster Beverage’s return on equity has eroded very significantly since 2009 even as it experienced a very sharp recovery after the 2015 low.
This very significant erosion was due to very strong negative trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of Monster Beverage’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend even as it experienced a very sharp recovery after the 2015 low.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
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Monster Beverage’s return on equity is above median (26.1%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the upper quartile (26.5%) reflecting asset turnover that is at the upper quartile (0.78X) and above median pretax margin (33.8%).
Tax “keep” rate (income tax management) is at the lower quartile (78.6%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is below median (1.25X).

GROWTH RATES

Overall, Monster Beverage’s growth rate has slowed very considerably in recent years.
Monster Beverage’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -2.5% per year. (More recently it has been 11.1%.)

Total asset growth has been 6.1% per year. (More recently it has been -18.9%.)

Annual E.P.S. growth has been 3.2% per year. (More recently it has been 19.4%.)

Equity growth has been 7.7% per year. (More recently it has been -19.9%.)

Monster Beverage’s consensus growth rate forecast (average of Wall Street analysts) is 14.1% — substantially above the average of the historical growth measures.
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Relative to the Monster Beverage Corp Peer Group, Monster Beverage’s historical growth measures are erratic. Equity growth (7.7%) has been below median. Total asset growth (6.1%) has been at the lower quartile. Revenue growth (-2.5%) has been lower quartile. E.P.S. growth (3.2%) has been lower quartile.

Consensus growth forecast (14.1%) is slightly above median.
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PRICE HISTORY

Over the full time period, Monster Beverage’s stock price performance has been variable and exceptional. Between December, 2008 and October, 2019, Monster Beverage’s stock price rose +908%; relative to the market, this was a +206% gain. Significant price moves during the period: 1) October, 2012 – November, 2015: +246%; and 2) June, 2009 – May, 2012: +371%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -0.4% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through September, 2019 of -0.4% is above median relative to Monster Beverage Corp Peer Group.

Current 5-year total return performance of 13.7% is above median relative to the S&P 500 Composite.
Through September, 2019, with above median current 5-year total return of 13.7% relative to S&P 500 Composite, Monster Beverage’s total return performance is below median relative to Monster Beverage Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, MNST’s overall valuation is quite high. The highest factor, the ratio of enterprise value/assets, is upper quartile. Price/equity ratio is upper quartile. Ratio of enterprise value/revenue is upper quartile. Price/earnings ratio is near the upper quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is above median.
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Monster Beverage has a minor value gap compared to the median. For MNST to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 7.38X to 7.01X. If MNST’s ratio of enterprise value/revenue were to fall to 7.01X, its stock price would be lower by $-3 to $54.
For MNST to achieve upper quartile valuation relative to the Monster Beverage Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 7.38X to 7.40X. If MNST’s ratio of enterprise value/revenue were to rise to 7.40X, its stock price would increase by $0 from the current level of $56.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, MNST is expected to continue to be a major Value Builder.
Monster Beverage’s current Price Target of $44 represents a -21% change from the current price of $56.30.
Monster Beverage’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
With this low Appreciation Score of 25, the neutral Power Rating of 55 results in an Value Trend Rating of D.
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Monster Beverage’s current Price Target is $44 (+86% from the 2018 Target of $24 but -21% from the 10/11/19 price of $56.30). This dramatic rise in the Target is the result of a +8% increase in the equity base and a +72% increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 31.9% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2015 low of 5%.

PTR’s growth forecast is 7.0% — above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 25%.

PTR’s cost of equity forecast is 10.1% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is steady at the 2015 low of 8.2%.
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At Monster Beverage’s current price of $56.30, investors are placing a positive value of $21 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 27.1% versus a cost of equity of 9.2%.
PTR’s 2020 Price Target of $44 is based on these forecasts and reflects an estimated value of existing assets of $25 and a value of future investments of $19.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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