mcintire investment institute - uvacollab : gateway · soda (hans) changed its company’s name and...

M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA

Zixing Chen, Chuxi Sun| 7 February 2013

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

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BUSINESS OVERVIEW

THESIS POINTS

MARKET MISCONCEPTIONS

VAR

RECOMMENDATION

RISKS


COMPANY OVERVIEW

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•  Founded in 1935 and Southern California-based, Hansen Natural Soda (HANS) changed its company’s name and symbol to Monster Beverage Company (MNST) on January 5, 2012

•  Develops, markets, and distributes energy drinks, fruit drinks, iced teas, and still water both in the U.S. and overseas

•  #2 energy drink behind Red Bull

•  Operates in two segments: Direct Store Delivery (95.3%), whose principal products comprise energy drinks, and Warehouse (4.7%), whose principal products comprise juice based and soda beverages

•  Promotes its products through the sponsorship of over 200 athletes


STOCK OVERVIEW (NASDAQ: MNST)

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Price: 48.33 P/E (ttm): 26.55 EPS (ttm): 1.82 Market Cap: 8.28B 52wk Range: 39.99-83.96 Avg Vol: 1,788,000

Monster Beverage Corporation (MNST)


THESIS POINTS

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q Decelerating margins growth rate

q Overhyped acquisition rumors q Limitations of well-defined consumer

marketing q Perceived health concerns and international

expansion uncertainties


•  Product concentration and lack of innovation

•  Vulnerability to market saturation

•  No real clear

differentiation between the products or their target markets among its nearly 30 different flavors

CONCENTRATED PRODUCT PORTFOLIO


ENERGY DRINK MARKET LOSING MOMENTUM

•  MNST’s 11.2% YoY growth in the past 4 weeks is off the pace of 14.3% YoY sales growth (ttm) o  Monster Beverage Corp 19.6% → 10.5 % o  Red Bull 15.9% → 18.1% o  Rock Star 2.4% → 2.5% o  Coca-Cola Co. 7.4% → 6.6% o  Pepsi Co. -12.6% → -17.8%

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•  Energy drinks’ YoY growth shows signs of deceleration

Energy Drinks’ YoY Growth (2001-2011)


MISCONCEPTION #1 ENERGY DRINKS’ PROFITABILITY GROWTH IS EXPLOSIVE

“The U.S. energy drink market has reached a saturation point much quicker than expected.”

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- Jonas Feliciano, Beverage Analyst at Euromonitor International


INVENTORY GROWTH SURPASSING REVENUE GROWTH

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•  Inventory growth surpasses revenue growth •  Wasted stale inventory hurts profitability

•  4th quarter's revenues continuously follow a downward trend

o  Less winter sports and sponsored games


3/4 MISSED ESP PROJECTIONS

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Monster Beverage Corp. YoY Revenue Growth

•  Growth is slowing down •  MNST continuously missed analysts' EPS expectations

in the last four questers


STAGNANT MARGINS AND WEAK OPERATING CASH FLOW

•  Stagnant operating margin caused by high raw materials costs and increased international expenditures

27.49%

17.12%


UNJUSTIFIED PREMIUM VALUATION

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Ticker P/E P/S P/B P/FCF D/E EPS

DPS 15.55 1.58 4.06 37.50 1.19 2.92 KO 19.45 3.52 5.05 54.16 0.99 1.92

MNST 26.15 4.08 9.71 28.93 0 1.82 PEP 19.32 1.71 5.24 51.79 1.30 3.75

•  MNST is currently trading at 26.6x earnings, 5.8x sales, and 17.4x EBITDA

•  A 25.3% growth rate in the past 5 years suggests unrealistic expectations for growth and outperformance


MISCONCEPTION #2 MNST IS THE NEW SBUX

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•  Highly developed brand, logo, copyrights, and trademarks

•  Physical stores, service, customized products

•  Product diversification with the recent acquisition of Evolution Fresh Juice

•  Markets its products

primarily directly to retailers

•  No patents •  Pre-packaged products •  Dependence on suppliers

for manufacturing and packaging products


THESIS POINTS

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marketing q Perceived health concern and international



IS MONSTER FACING A BUYOUT?

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•  Rumors of a possible takeover has been spread around since 2007

•  HANS’s price peaked but soon slumped over the next 4 quarters


IS MONSTER FACING A BUYOUT?

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•  Similarly, MNST’s price peaked in Jun 2012 but fell significantly in the following two quarters

MNST’S Share Price, 2011-2013


RISKS OF ACQUISITION

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•  MNST went up 63% in value during 2012. While MNST’s size (especially by book value) makes it an attractive buyout candidate, a close to $10 billion acquisition cost would make this deal the most expensive one in the industry’s history

•  FDA Investigation and increased calls in Congress can

inspire regulatory action and would make a buyout highly unlikely to occur in the next 3 months


THESIS POINTS

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HIGH MARKET COMPETITION

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LIMITED CORE DEMOGRAPHICS

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Age and market discrimination continue to be a problem for the energy drink market.

Current Advertising: •  Sports, parties •  Selling Lifestyle •  Premium access •  Celebrities

endorsement

Targeted Audience: •  Athletes •  Male, aged 14-26 •  Extreme sport fans,

gamers, hip

Challenges: •  Missing new markets •  No use of mainstream

media •  No top-of-mind

awareness •  Stigma attached to

energy drinks


MISCONCEPTION #3

MNST RUNS HIGHLY SUCCESSFUL MARKETING CAMPAIGNS

•  Red Bull currently spends approximately 30% of their worldwide sales on marketing and advertising which equates to $600 million

•  Red Bull created the non-traditional content marketing strategy since early 1980s and has long been in the game of marketing to extreme sports

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•  Monster promotion spending climbed to 23 %, or approximately $105 million, in 2012

•  Monster entered the market after Red Bull, discounted their product, and adopted similar marketing strategy


RED BULL: EXPLORING HUMAN POTENTIAL

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MONSTER: SHEDDING THE BAD BOY IMAGE

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THESIS POINTS

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CONTINUED HEALTH AND SAFETY CONCERNS

•  In recent years, energy drinks have caused more and more ED visits

•  FDA routinely attempts to push for tighter restrictions on the marketing of energy drinks to children and teens

•  Negative effect on consumer perception outweighs potential for increased government regulation

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Energy Drink-Related Emergency Department (ED) Visits



•  On Oct 22nd, 2012, FDA started investigating reports of five deaths that might be associated with Monster Energy Drinks.

•  This news caused a 13% drop in the Monster’s share price.

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MNST’S Share Price, Oct 22nd, 2012



•  Although the FDA have terminated the investigation, it still kept an close eye on the company’s performance and health issues that were possibly caused by energy drinks.

•  The company need to resolve these health concerns to bring back positive investor sentiment.

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UNCERTAINTIES IN GEOGRAPHICAL EXPANSION

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•  Competitors like Coke, Pepsi, Red Bull, and Starbucks all have established a substantial international presence

•  Globally speaking, the Red Bull has almost half of the market share, especially in some Asian countries where Monster have not entered

•  Concentrated product portfolio might be a significant weakness

Global Share of Energy Drink Market


UNCERTAINTIES IN GEOGRAPHICAL EXPANSION

•  High shipping expenses and other cost pressures outside the U.S. threaten profit margins and operating performance

o  Example: product damage associated with the rollout into Japan and South Korea hurt Monster's international margins in Q2 of 2012

•  Red Bull is banned in some countries due to the ingredient Taurine such as Denmark, France, and Norway. And Taurine is a key ingredient for energy drinks. Therefore, it is reasonable to say that Monster might face the same situation when it expands to foreign markets

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THESIS POINTS

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VAR

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Survey: Energy Drink vs. Energy Drinks Alternatives Findings: (Participants are random sampled UVA students ) •  Preferences: Coffee drinks > Energy Drinks > Sports Drinks > Soda

•  76.5% of participants consume Red Bull most often, 17.6% consume Monster most often, and 5.9% chose Monster XXL as their favorite energy drink

•  58.3% of participants drink caffeinated drinks “feel awake in general,” 25% chose “to focus with studying,” and 12.5% of participants “do not drink energy drinks”

•  100% of participants are aware that there are health risks associated with energy drinks, while 58.3% of them “try to find healthier alternatives to energy drinks”


VAR

“Energy drinks have become increasingly popular these days… but there have been a few complaints toward them… ”

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- Customer Service at Walmart, Charlottesville


VAR – ONLINE CUSTOMER REVIEWS

•  “I've been drinking this over a year, until I got arrithmias and anxiety, and

panic attacks. It's not worth the risk!” •  “Contains the artificial sweetener 'sucralose', which causes me migraines

and makes me lethargic. There should be a sucralose warning on the front label!”

•  “There are always loose cans in the box, there are always dented cans. I refused one delivery due to the cans open and the box soaked, falling apart.”

•  “Case arrived damaged, only offered a return of item, are they joking?” •  “This box was so damaged it lost the box it was mailed in and was leaking

from several cans of the product. This was the worst I have ever received a product over the 10 plus years.

*Taken from Amazon.com 33


CATALYSTS

•  Inflating commodity costs and government oversight limit long-term growth

•  Lawsuits damage the company’s public image and influence market sentiment

•  The outlook for MNST’s 10-K is bearish

•  Too many short, mid, long-term headwinds

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RISKS

•  Development of innovative strategies to differentiate its brand

•  Successful market penetration and international expansion

•  Still an appealing buyout target

•  Relatively strong financial statistics

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RECOMMENDATION

•  Immediately initiate short position at 0.75%

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QUESTIONS?

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APPENDIX 1 SWOT ANALYSIS

Strengths: •  Market leadership – S&P 500 •  Strong and above-industry-average

growth •  No long term debt •  Strong, fresh, and fashionable brand

identity Weaknesses: •  Less financial resources than

competition •  Lack of innovation •  Reliant on small product base •  Inexperience in the international

market •  Lack of patent on its recipe means

low market barrier

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Opportunities: •  New product Peace Tea adds more

revenue stream •  Celebrities marketing and advertising •  Possibility of being bought out by KO or

PEP •  Consumer recognition though

sponsorship like sport events

Threats: •  Government regulations •  Consumer awareness of health •  Frictions preventing its buyout •  Consumers not accepting its product in

emerging/new markets •  Dependence on energy drink segment •  Enormous industry product competition •  Changes in consumer preferences

mcintire investment institute - uvacollab : gateway · soda (hans) changed its company’s name and...

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