monster beverage corporation financial ratio...

Loras College

Monster Beverage Corporation Financial Ratio Analysis

Analysis of Key Ratios

Loras College

12/4/2012Austin Heeren and Colin Seidel

Principles of FinanceProfessor Matthew Keyes

Monster Beverage Corporation is a company that manufactures various flavors of pop, juices and different types of energy drinks to the public, which classifies Monster within consumer goods soft drink category. The Monster Beverage Corporation previously went by the name of Hansen Natural which is named after its founder Hubert Hanson, who sold juice to film studios (with the help of his grandchildren) in 1935. In 1988, the company filed for bankruptcy and was acquired by the California CoPackers Corporation, who chose the company Hansen Beverage Company (which eventually would be changed in 2012 to Monster Beverage Corporation as revealed in statement to shareholders by Rodney Sacks). The Hansen Beverage Company was acquired by the California CoPackers Corporation in 1988, so the Monster Beverage Company has been publicly traded for 24 years. Unlike Red Bull and Rockstar, Monster operates as a publicly held corporation. In the energy drink industry, Red Bull has the largest market share with Monster closely following and Rock lagging far behind in third place. Monster also competes with companies such as Pepsi and Coke-Cola, which offer many beverages with similar tastes and caffeine dosages to the drinks provided by Monster. Pepsi in particular has released numerous product line extensions to their Mountain Dew such as Code Red, Livewire, and Voltage which have been targeted to consumers through the use of extreme sports and video games (which Monster has also done).

Rodney C. Sacks, age 62, currently serves as the CEO and an active board member for Monster Beverage Corporation; he has been the CEO for 21 years and also has been with the company for 21 years according to Forbes.com. Monster Beverage Company is primarily listed and traded on the NASDAQ. While the Monster energy drinks are sold at convenience stores, large retailers like Walmart and Costco, vending machines, and at sporting events, their actual headquarters are located in Corona, California. Monster has been able to reduce their liabilities and curve the costs associated with their growth, by using third party bottlers to manufacture all of their products (as Junior Buffet discusses in his article). The Monster brand is primarily focused towards individuals who are interested in the mental stimulation received from their primarily high caffeine products, which is highly conducive to high school students, college students, sports enthusiasts, gamers, and professionals that may suffer from lack of sleep. Energy drinks provide many of the same benefits that people have traditionally relied on coffee for.

Economic Analysis

The economic condition of the market has been volatile recently. Inflation has been playing a large role in affecting consumer confidence and spending. Spending in some sectors has decreased and in others it has increased. America is slowly climbing out of a recession and entering into a recovery period. Unemployment is at high levels, while interest rates and inflation continue to stay at low levels. Consumers are typically spending less money and are looking for more ways to save when they do spend.

Back in October 2007, the DOW peaked at around 14,000 and then the economy was hit hard. The world entered a global financial crisis that was followed by a recession. A monetary policy aimed to stimulate the economy by encouraging consumer spending was put into place, and it is believed that this lead to the steady incline of stock prices. The DOW is now trading at record highs as it closed at 14,865. Similarly, the FTSE 100 has also experienced increases. However, the Nikkei 225 is still trading well below its pre-recession numbers.

Industry Analysis

Monster is a member of the Beverages-Soft Drinks industry two of its main competitors are Pepsi and Coke. The industry has seen a decent amount of growth in the past few years. Specifically, the energy drinks industry is very fast growing. Most of this is due to the increasing demand for energy drinks. Companies in this industry grow by introducing new product lines and by entering the international market. It is also interesting to note that soft drink companies typically have a high profit margin and a strong fixed assets turnover ratio. Also, the industry average for ROE is 27%.

Fundamental Analysis

Monster’s stock is currently trading in the middle between its 52 week low of 39.99 and high of 83.96. On Friday April 12th, Monster closed at $56.75 per share. A large reason for this drop in price is because of legal problems that Monster has recently faced. This involved lawsuits saying that Monster’s energy drinks are health hazards and can cause heart attacks. Monster has consistently been increasing its sales since 2010, and they are expected to continue to experience increase in earnings. One reason why I believe that Monster will continue to grow is because they have a niche in sports drinks. They sponsor famous athletes and major events to advertise their products. Monster recently announced that they are going to buy back $200 million of their shares. This is much smaller than the previous buyback programs that Monster has done. An expert from the Motley Fool says that this is because Monster didn’t have as much free flow cash to support the same amount of their previous buyback programs. However, share repurchases look good to investors because it gives them the implication that the stock is at a good buying price.

Common Size Income Statement ComparisonsMonster Pepsi

Period Ending31-Dec-

1131-Dec-

1031-Dec-

0931-Dec-

1125-Dec-

1026-Dec-

09Total Revenue 100% 100% 100% 100% 100% 100%Cost of Revenue 47.5% 47.8% 46.4% 47.5% 45.9% 46.5%Gross Profit 52.5% 52.2% 53.6% 52.5% 54.1% 53.5%Operating Income or Loss 26.8% 26.7% 29.5% 14.5% 14.4% 18.6%Income Before Tax 26.8% 26.8% 29.4% 13.3% 14.2% 18.7%Income Tax Expense 10.0% 10.5% 11.1% 3.6% 3.3% 4.9%Net Income 16.8% 16.3% 18.3% 9.7% 10.9% 13.8%

When you compare just the first three rows of the income statement, Monster Beverage Company appears to have a very similar standing with Pepsi. The cost of revenue and gross profit reveals that each of these businesses are indeed very successful at making a profit from their product lines, and more importantly that these companies are excellent to compare. While Monster is similar to Pepsi in top of the line comparisons, they look drastically different at bottom line comparisons as a result of their business model. By subcontracting third party distributors, Monster is able to forego most of the operating costs that Pepsi has to pay for. Monster doesn’t own the factories so they don’t have to pay the salaries of the workers and they didn’t have to take out loans to finance the manufacturing facilities. The third and perhaps most important effect of subcontracting the manufacturing and distribution out to third parties, is that Monster can rapidly increase or decrease their supply, expand to new markets, and leave inefficient markets with lower costs and time lag. These are the primarily elements that allow Monster to significantly outperform the competition such as Pepsi, even though both companies started with a gross profit near 53%. The common size income statement does however reveal one potential weakness of Monster; as a result of their lack of workers, property plant and equipment, and other tax ride offs, Monster has to pay three times as much of their total revenue into the government in the form of income tax than Pepsi. The income statement data from Google Finance doesn’t give enough information to explain Monster’s transition from Gross Profit to operating income, but Monster’s operating income at about 27% is clearly much higher than Pepsi’s which is about 14%. The effect of Monster’s business model carries into the bottom line where Monster has averaged about 17% net income over the past 3 years, while Pepsi has only averaged about 11%.

Common Size Balance Sheet ComparisonsMonster Pepsi

Period Ending30-Dec-

1130-Dec-

1030-Dec-

0930-Dec-

1124-Dec-

1025-Dec-

09Cash And Cash Equivalents 26.4% 30.9% 41.0% 5.6% 8.7% 9.9%Total Current Assets 86.8% 84.0% 73.2% 23.9% 25.8% 31.5%Long Term Investments 1.7% 3.9% 10.1% 2.0% 2.0% 11.3%Property Plant and Equipment 3.3% 3.0% 4.2% 27.0% 28.0% 31.8%Goodwill 23.1% 21.5% 16.4%Intangible Assets 3.6% 3.8% 4.2% 22.6% 20.3% 6.6%Total Current Liabilities 9.8% 8.4% 5.2% 24.9% 23.3% 21.9%Long Term Debt 28.2% 29.3% 18.5%Total Liabilities 14.1% 13.9% 13.4% 71.6% 68.8% 57.7%Total Stockholder Equity 35.9% 36.1% 36.6% 28.4% 31.2% 42.3%

The common size balance sheet really emphasizes the benefits that Monster receives by relying on third party manufactures and distributors even more than the income statement did. Monster had an outstanding 86.8% of their assets listed as current assets compared to the 23.9% of Pepsi. This gives the investor faith that Monster can successfully expand operations or face any future financial problems that may trouble the company. Pepsi has a large percentage of their overall assets tied up in property, plant, and equipment, which allows Pepsi to have greater control over their long term production of their product and helps solidify the actual physical value of the company. A very large portion of Pepsi’s overall assets are actually listed in the form of Goodwill and Intangible Assets, which draws another distinction between Monster and Pepsi. Monster is still in a niche market where it is able to primarily focus on producing its product and improving methods of distribution, while Pepsi has taken a position where it has to focus corporate brand equity and imaging. While patents, new products, and brand equity all provide to the income and well-being of a corporation, Monster’s ability to make its profits from very few assets (especially large amounts of goodwill and intangibles) seems to put Monster in a great position. We will expand about more of the balance sheet items in the financial ratios section, but in general Monster has about ¼ of the liabilities of Pepsi and has a much stronger financial position based on the common size balance sheet.

Key Financial Ratios Analysis:

Monster Beverage Corporation

Pepsi-Co Industry Average

Liquidity Ratios 2011 2010 2009 2011 2010 2009 Current

4.44 4.97

6.99

0.96

1.11

1.44

1.6

Quick 3.86

4.18

5.70

0.75

0.89

1.14

1.1

Total Current Assets (CSBS)

86.8% 84.0% 73.2% 23.9% 25.8% 31.5%

Cash and Cash Equivalents (CSBS)

26.4% 30.9% 41.0% 5.6% 8.7% 9.9%

Short Term Investments (CSBS)

30.2% 21.3% 2.3% 0.5% 0.6% 0.5%

Monster Beverage Corporation has a current ratio of 4.44, in an industry that has an average of 1.6. Over the past two years, the current ratio has decreased from 6.99 to 4.44, which is a somewhat alarming trend. If this trend continues to occur into the future we may be more concerned about the financial health of Monster, but with the 2011 current ratio more than doubling the industry average, Monster is still performing exceptionally well. As Monster has grown in recent years, Monster has more than tripled its total liabilities, which is a leading reason to why the current ratio has decreased over the past 2 years. Monster's assets have also increased over this period of time, but its percentage growth is not proportionate, since the total liabilities amount from 2009 was relatively small. Monster's current ratio is also more than four times better than the beverage titan Pepsi, indicating that Monster may have a tremendous advantage in adapting to fortunate and unfortunate circumstances. The common size balance sheet illustrates the liquidity difference between Pepsi and Monster and reinforces the rare position that Monster currently has. With 86.8% of its assets listed as current assets, Monster should be capable of repaying any incurred liabilities, perform research and development, and still have enough money left to buy more equipment. Monster has seen an increase in the percent of assets recorded as current assets over the last three years, which solidifies Monster’s extremely strong financial position, which sharply contrasts Pepsi who has seen a decrease over the past three years in the amount of their assets classified as current assets.

Monster has a quick ratio of 4.44, which is excellent since the industrial average is 1.1. Again, there is a decreasing trend from 2009 to 2011, but as stated in the current ratio section; this trend is a result of increasing total liabilities from a relatively small amount. If this trend was to continue into the future we would be more concerned. Monster's use of third party bottlers along with the distribution of their products to high traffic retailers, allows Monster to quickly move their product and reduce inventory. The minimization of Monster's inventory ensures that Monster will hold a healthy quick ratio into the future and will also be able to repay lenders.

Over the past 3 years, Monster’s combined position in cash and cash equivalents and short term investments has increased, while Pepsi’s has decreased over the same period. In addition, Monster currently holds 55% of their total assets in these extremely liquid assets while Pepsi holds around 6% of their total assets in this position. Even more beneficial for Monster, they

have increased their investment in short term investments over the past 3 years and almost exactly proportionally decreased their cash and cash equivalents positioned allowing them to better leverage their excess cash flows. There are no promises on the investments that they make, but assuming that Monster is able to reinvest these funds at a higher rate than they were making in their bank accounts this investment should further increase the profitability of Monster. Pepsi on the other hand has just over 5% of their total assets in the form of cash and have experienced a decrease over the past three years. While 5% may be enough to keep the company above the water for some financial problems, it is likely not enough to sustain a serious financial problem. Pepsi is a large and powerful company, but compared to Monster they seem to be relying on their credit and their good name to stay in business more than the safety of their financial policies.



Asset Management Ratio 2011 2010 2009 2011 2010 2009 Inventory Turnover 10.9

5 8.

51 10.5

7 17.3

8 17.1

5 16.5

1 13.2

Days Sales Outstanding 50.40

51.29

38.07

37.94

39.90

39.04

27.7

Fixed Assets Turnover 37.72

37.74

34.32

3.38

3.03

3.41

39.3

Total Asset Turnover 1.25

1.14

1.43

0.91

0.85

1.08

0.5

Inventory (CSBS) 11.4% 13.4% 13.5% 5.3% 4.9% 6.6%PPE (CSBS) 3.3% 3.0% 4.2% 27.0% 28.0% 31.8%

Monster has an inventory turnover ratio of 10.95, which is acceptable since the industrial average is 13.2. Monster does not perform as well within this ratio as they did in the liquidity ratios, but Monster proves to be more consistent and along with a favorable trend. While Monster is below the industrial average, it is still within the same ball park. Further, the inventory turnover is less impactful to Monster than other companies since so much of their inventory is controlled by third party companies that handle the actual manufacturing. As the Monster Beverage Corporation matures, it may wish to pursue higher inventory turnover ratios to increase their overall profitability and rival some of the industry leaders such as Pepsi with a 17.38 turnover ratio. Ultimately, if Monster is unhappy with its long term inventory turnover ratios it could either buy out or choose to not renew their contracts with third bottle manufacturers, so in favor of directly handling the production of its products and their distribution. To further understand the issue of inventory turnover, we can examine the inventories of Monster and Pepsi on the common size balance sheet. As a consequence of Monster using third party distributors from across the world, Monster will also have more locations (per volume sold than Pepsi), and these third party companies are likely less efficient

than the consolidated Pepsi corporation. This means that Monster will have a larger percentage of their assets tied up in inventory unless they find a more efficient way to make use of their inventory. Data from the common size balance sheet along with the inventory turnover ratio suggest that while Monster seems to be making slight improvements in inventory management, Monster may be content with their current positioning. While it would be optimal to further decrease excess inventory, Monster’s fantastic fixed asset turnover and strong current asset position should more than make up for this disadvantage.

Monster has a days sales outstanding of 50.40, which appears to be considerable weakness since the industrial average is 27.7. Monster takes almost twice as long as other companies within its industry to receive compensation from its receivables. Adding to the problems for Monster within this ratio is the significant 13 days increase from 2009 to 2010. Then in 2011, the days sales outstanding only decreased by 1 day, indicating that Monster is still plagued with a much higher than average days sales outstanding. Pepsi is well above the industry average at 37.94, but its well outperforming Monster on this issue. Currently, Monster enjoys great financial health and may not be harmed by not collecting from their receivables as quickly as other companies, if Monster faced financial difficulties in the future this relatively high days sales outstanding could significantly add to any financial hardships. Monster could employ better incentives to their resellers or they could shorten the length of time resellers are given to pay back (and increase penalties). However, given the current profitability of Monster, they do not need to take any course of action at this time (especially since taking this course of action could reduce their overall sales).

Monster has a fixed asset turnover ratio of 37.7, which looks very average since the industrial average is 39.3. Monster's fixed asset turnover keeps up with the industry average, which indicates that Monster is using its fixed assets well. Pepsi has a fixed asset turnover of 3.38, which is less than one-tenth of Monster; relative to Pepsi, Monster appears to have considerable control and strength in this area. Monster is currently able to work off just 3.3% of their assets as property, plant, and equipment compared to the 27% of Pepsi. Similar to fixed asset turnover, Monster is able to get by with one tenth of property, plant and equipment of Pepsi (with respect to their proportions). Not only does this enable Monster to spend its money on additional assets, products, and other investment opportunities, it also gives Monster the ability to grow at an exponential rate. While realistically there is a limit to the amount of energy drinks that people in a specific area are willing to buy (and therefore also in the world), Monster’s use of fixed assets should allow them to maximize their profits in any region they choose to sell. Even though Monster looks comfortable, Monster could make the decision at any time to build or buy manufacturing plants, which may enable them to increase the usefulness of their fixed assets and overall profitability.

Monster has an asset turnover ratio of 1.25, which is good since the industrial average is 0.5. This looks to be an area of strength for Monster since their fixed asset ratio was only average in comparison to the industry, yet their overall asset turnover ratio is more than two times better than the industry average, revealing that Monster is proficient in managing its non-fixed assets. Monster once again shows its relative strength over Pepsi in this category, and indicates that Monster has good control over its assets. Monster's strength in asset turnover suggests that

Monster may benefit from additional investment in assets, including the purchase of manufacturing plants should they choose to do so in the future.



Debt Management Ratio 2011 2010 2009 2011 2010 2009 Total Debt to Assets 28.1% 27.8% 26.9% 71.8% 68.9% 57.8% 60.6%Times Interest Earned NA NA NA

11.32 10.12

21.35

7.6

Total Current Liabilities (CSBS)

9.8% 8.4% 5.2% 24.9% 23.3% 21.9%

Long Term Debt (CSBS) 0% 0% 0% 28.2% 29.3% 18.5%Total Liabilities 14.1% 13.9% 13.4% 71.6% 68.8% 57.7%

Monster has a total debt to assets percentage of 28.1%, which is excellent since the industrial average is 60.6%. Monster's success looks especially impressive since the industry giant in Pepsi has a debt to assets percentage of 71.8%. This relationship suggests that Monster maintains excellent financial health, which will enable Monster to address various financial decisions in the future. The low level of debt compared to the industry ensures that Monster will be able take out loans for expansion, buy manufacturing plants, expand their market overseas, or come up with new products. Monster should also be able to secure favorable interest terms since their debt percentage is low, since creditors should have high confidence that Monster could repay their debt.

Monster does not have a times interest earned ratio because they do not have any long term debt which requires interest payments, however the industry average is 7.6. The lack of long term interest bearing debt may be one of the major strong suits of Monster and a contributing factor to their overall profitability. By relying primarily on third party companies to manufacture their products, Monster did not have to make large financial investments into property, plant and equipment that other companies had to make. Should Monster decide to pursue the self-production of their products in the future, they should benefit from better interest terms and from their cash inflows from operations which have increased over Monster's relatively short life.

From the Debt to Assets percentage we can see that Monster has about a three times better debt to asset position than Pepsi; using the common size balance sheet we can attempt to better understand these discrepancies. Monster’s short term current liabilities are 9.8% of their total liability and stock holder equity position compared to Pepsi which is 24.9%, but the increasing amount of current liabilities is alarming for both companies. While short term debt may largely be used to finance inventory and current assets, it could prove to be troublesome over the long run if the tab grows too large. Currently, Monster has the excess cash to the tied up inventory alleviating the majority of this potential problem. This could particularly be a problem for Monster since they have a lower inventory turnover ratio and longer days sales outstanding ratio than Pepsi, so their short term debt could cut deeper into their profits. But once again Monster’s business model kicks in with zero long term debt compared to the 28.2% of Pepsi. While Pepsi continues to trend with increased long term debt, Monster maintains zero long term

debt, and will remain near optimal profitability unless they are unable to pay off their short term liabilities quickly enough (and incur higher interest rates than long term debt). Over the past three years Monster has increased their total liabilities by .7% while Pepsi has witnessed an increase in total liability of 13.9% (as a percentage of their total liabilities and stock holder equity). While it is usually not advantageous to increase your total liabilities and debt, Monster’s relatively small increase should not bother the mind of the investor. Even through this small increase Monster has been able to maintain an extremely small percentage of debt that is majority in the form of short term liabilities. The data supports the idea that Monster should be cautious of their inventory practices and attempt to optimize both the amount of inventory that is held and their repayment plans with their distributors in order to best optimize their profitability. Pepsi’s 13.9% increase in total liabilities indicates the problem associated with too much debt financing, as it is very easy for the liabilities to build up after you pass a certain threshold. Overall, Monster appears to have a solid debt position although some may even claim that they benefit from more debt so that they could create additional leverage. We think that Monster’s current approach is better in the long term since their business model allows them to maintain profitability without the use of debt, but if we were Monster we would look into the purchase of plants (and the debt that we would incur) to decide if such a move could further increase profits. As Monster reaches their full potential in the United States and Europe, they may need to begin working on Vertical integration to see a further increase in profits.



Profitability Ratios 2011 2010 2009 2011 2010 2009 Operating Margin 26.8% 26.8% 29.4% 14.6% 15.8% 19.6% 40.0%Profit Margin 16.8% 16.3% 18.3% 9.7% 10.9% 13.8% 24.2%Return on Assets 21.0% 18.5% 26.1% 8.8% 9.3% 14.9% 19.0%Basic Earning Power 33.6% 30.5% 42.0% 13.3% 13.4% 21.3% 4.0%Return on Common Equity

29.2% 25.6% 35.7% 31.1% 29.7% 35.2% 27.0%

Retained Earnings (CSBS)

42.9% 38.5% 41.9% 55.2% 54.3% 84.6%

Treasury Stock (CSBS) (15.3%) (10.5%) (13.6%) (24.5%) (24.5%) (35.5%)

Monster has operating margin of 28.1%, which looks to be below average since the industrial average is 40.0%. However, in comparison to Pepsi's operating margin of 14.6% Monster appears to be in a strong position. The industry average that I used was from 2009 and may not be reliable for the comparison of operating margin for 2011. To increase Monster's operating margin, Monster wouldn't want to decrease their sales which means that Monster would need to increase their earnings before interest and taxes. Monster currently sells its products for about the same price as Rockstar, Amp, Full Throttle, and other such drinks even though Monster has a considerably larger market share, so Monster could choose to raise its prices. Monster's total sales revenue is close to that of Red Bull's even though Red Bull has a higher selling price, so Monster could likely increase their sales price (at least on some of their products) without suffering serious consequences on overall sales. Monster could also look to decrease their costs from advertising and distribution, or decrease costs by producing the products themselves. Monster's market share and overall net income is already increasing, so

Monster has the luxury to continue its current underlying business strategies or to increase its operating margin if chooses to do so.

Monster has profit margin of 16.8%, which looks to be below average since the industrial average is 24.2%, yet once again Monster outperforms Pepsi by almost two to one in this category. Monster could employ the same strategies as stated before in the operating margin section and additionally, Monster could use more make use of greater debt financing and the potential write offs of interest expense to increase their net income (assuming their sales revenues also increased). The numbers from Pepsi also seem to suggest that the real profit margin for the soft drink industry may actually be lower than 24.2%, and Monster may actually have a better profit margin than the average company.

Monster has return on assets of 21.0%, which above average since the industrial average is 19.0%. As aforementioned, Monster appears to have excellent control of their assets, which is reflected in their above average return on assets. Monster outperformed Pepsi by two to one in this ratio, again revealing the relative comparative advantage that Monster has over Pepsi. Monster may be well served to purchase additional assets should the need arise, since they have proven to be good at managing them.

Monster has basic earning power of 33.6%, which looks to be well above average since the industrial average is 4.0%. We have low confidence that this industrial average is consistent with the real industrial average; however Monster appears to have great success regardless. Monster outperformed one of their competitors in Pepsi by almost three to one in this ratio, suggesting Monster's foothold in this category. Monster's business model has done a great job of utilizing the assets that they have and producing high levels of sales from those assets.

Monster has a return on common equity of 29.2%, which is approximately average since the industrial average is 27.0%. Monster's return on common equity is down from their 2009 levels and likely is a result of the economic recession, since a similar experience was encountered by Pepsi. Even if Monster does not provide exceedingly high results for return on common equity they at least provide the industry average suggesting Monster is a reliable company for investors to invest in. Monster's lack of debt leveraging may be one of the reasons that Monster does not have a higher return on common equity. Monster may explore some my previously explained prescribed changes to increase their profit and operating margin, along with utilizing additional assets in order to increase both their net income and their return on common equity. Realistically, it would have been difficult for Monster to maintain the same level of return on common equity as in 2009, since their stockholder's equity almost doubled from 2009 to 2011.

Both Monster and Pepsi appear have very strong Retained Earnings positions, but Pepsi seems to be significantly stronger with 55.2% of their total liabilities and stockholder equity in retained earnings as compared to Monster’s 42.9%. Both companies have a sizable amount of earnings which presents a sizable “real value” to stockholders of each company. Monster has slowly increased their retained earnings by 1% over the past three years, while Pepsi has decreased their retained earnings by 34.6% in the same time frame. Pepsi’s instability of earnings may or may not be a direct problem depending on how they actually invested the funds, but such

a decrease in retained earnings is troublesome to investors. Monster’s stable and slow growth is much more comfortable for investors because it demonstrates the relative stability (and dare I say safety) that Monster has. The large decrease in retained earnings by Pepsi was also accompanied by a large increase total liabilities (as mentioned above), which continues to address the reason why Monster’s low debt, high asset position is so advantageous.



Market Value Ratios 2011 2010 2009 2011 2010 2009 Price/Earnings

29.92 22.93

16.84

15.08

16.46

15.79

19.70

Market/Book 8.20

5.62

5.79

5.01

4.86

5.63

25.01

Monster has a P/E ratio of 29.9, which is excellent since the industrial average is 19.7. Monster has performed well over the course of its life and especially in the last few years where it has almost tied Red Bull in market share. Shareholders are willing to pay more for one dollar of Monster's earnings than other companies within the industry because Monster has continued to grow and exceed expectations. Conversely, Pepsi's P/E is below the industry average because they have reached a level of maturity where stockholders do not expect any great growth. Monster currently has an increasing P/E slope, which is great for the company but may be troublesome to investors if Monster's growth begins to reach a plateau. The recent concerns surrounding the effects of energy drinks and supplements on individuals long term health, has brought down the price of Monster recently and thus the P/E ratio, and materializes some of the potential threats that investors may risk by investing in Monster (and so far above the industry average for P/E).

Monster has a M/B ratio of 8.2, which is below average since the industrial average is 19.7. This ratio indicates that people are willing to pay less for a dollar of Monster's book value than for other companies. Monster hasn't been around as long as many other companies in the industry, so its book price likely higher than their book price, meaning that their market to book ratio won't look as well. Ultimately this has little significance to Monster since their P/E ratio is performing so well, along with the majority of their other key financial ratios. The M/B ratio is also higher Pepsi, indicating a relative strength even if Monster is below the industrial average.

DuPont Equation 2011 2010 2009 2011 2010 2009Monster Beverage Corporation Pepsi-Co

Profit Margin 16.8% 16.3% 18.3% 9.7% 10.9% 13.8%

Total Asset Turnover 1.25

1.14

1.43

0.91

0.85

1.08

Equity Multiplier 1.39

1.38

1.37 3.52 3.20 2.36

ROE 29.2% 25.6%

35.7% 31.1% 29.7% 35.2%

The DuPont equation yields Monster a ROE of 29.2%, which is higher than the industry average of 27.0% that we previously explained. Monster had a lower profit margin at 16.8% than the industry average at 40%, which is an area that Monster has many options to improve. Monster has a massive growth potential because it has kept its prices equal to its competition to this point, even though it has done a better job of promoting, flavoring, introducing new products to the market, increasing sales, and ultimately increasing market share in the past years. If Monster were to increase the price of some of its products without losing sales (which given the success Monster has had in recent years is highly likely) Monster could significantly increase its profit margin and therefore its ROE. Monster already had a very high 1.25 asset turnover ratio compared to the industry average of 0.5, so Monster would only need to focus on maintaining this ratio through the continued effective use of their assets. Monster is behind Pepsi-Co however, so they may want to eventually acquire more assets in order to increase sales (by enough to more than offset the increase in assets). We don't have an industry average, but Monster has a higher equity multiplier (or leverage ratio) than Pepsi which has performed well in the other two categories. Monster managed to have a higher equity multiplier even though Monster only has a 28.1% debt to asset ratio, while Pepsi has 71.8% and the industry average is 60.6%; this is one of the reasons that investors are willing to pay more for Monster than other companies within the same industry. If Monster has the capability to significantly increase their equity multiplier which could significantly increase their overall ROE. Monster has significant growth room to increase their profit margin and their equity multiplier, and they could potentially increase their total asset turnover ratio at the same time. These factors combined make investing in Monster to be a lucrative option for potential investors.

Monster Beverage Company continues to show trends for growth and potential for massive growth. While Monster is currently facing some of the difficulties associated with the health risks associated with caffeine and the general regulatory actions of Federal Drug Administration, Monster has enormous room for continued growth. In addition to its growth potential, Monster has highly liquidity ratios and according to Buffet Junior, "as of September 2012, the company had over $610 million in cash and investments with minimal debt (mostly operating leases)." On top of everything else Monster has going for it, Monster has excellent opportunities for growth outside of the United States "considering less than 18% of the company's net sales come from outside the U.S." (Junior Buffet). The overall industry sales within the actual energy drink industry (as opposed to the general soft drink industry) as seen on the Energy Fiend website, suggests that energy drink sales are increasing for Monster and for the industry as a whole. Monster's net income has also consistently increased from 2009, so these increases in sales translate to increases in net income. In the last year, competition in the form of 5 hour energy and other energy shots have provided addition competition for Monster, but energy drinks themselves appear to have retained the greatest market share (and there also appears to be room for both energy drinks and energy shots). In 2012, Monster hit its highest ever price of $83.96 per share but despite the overall success of the company, Monster is currently trading at $51.66 (as of December 4, 2012). Once the legal controversy surrounding the

deaths 5 people (with deaths related to Monster, but also possibly related to pre-existing hearth conditions and interactions with other drugs), Monster's stock price will likely rise past the previous high. "Additionally, considering that the company earns around $300 million in annual free cash flow, the company has little need to tap the capital markets for funds" (Junior Buffet). Monster Beverage Corporation has enormous room for domestic and international growth, the capital to do so, the ability to secure additional financing at low interest rates, and is currently trading at a deflated price as a result of relatively minor FDA investigation. We are currently very interested investing in Monster Energy Corporation and would do so before the stock price significantly increases again.

If we were analysts, we would definitely say buy Monster Beverage Corporation stock while you still can at a deflated price. We would need to spend more time examining the price dropping trend of Monster, to decide on a specific time to buy Monster, but we would definitely want to buy Monster stock before the prices started to increase quickly again. We would also examine the history of other stocks that faced investigation from the FDA from relatively minor complaints (while I understand any number of deaths associated with a product is severe, the number of deaths and direct involvement of the Monster product seems to be rather minor relative to the number of users). Finally, we still wouldn't put all of my client’s eggs into one bucket, in the chance that Monster can't recover from the FDA investigations and continues to drop in price indefinitely.

Bibliography

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Deichert, Meghan, Meghan Ellenbecker, Emily Klehr, Leslie Pesarchick, and Kelly Ziegler. "Strategic

Management in a Global Context." CSBSJU. N.p., 22 Feb. 2006. Web. 5 Apr. 2013.

<http://www.csbsju.edu/documents/libraries/zeigler_paper.pdf>.

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4d72-8e2d-77a18209d622/HANS_News_2012_1_5_General_Releases.pdf. Accessed

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Full Year Financial Results." 27 Feb. 2013. Web. 10 Apr. 2013.

<http://investors.monsterbevcorp.com/releasedetail.cfm?ReleaseID=743823>.

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