Monster Beverage: just too expensive

Jack Taylor

Thesis

I am bearish on Monster Beverage (NASDAQ: MNST) because I consider the company’s stock to be overvalued. In my view, trading at a P/E of nearly x40, the current market environment provides investors with much better opportunities to allocate capital. In particular, Monster Beverage stocks haven’t lost much value since the start of the year and have therefore outperformed the S&P 500 by about 20 percentage points. I like to view the current strength in the stock price as a sell opportunity and pivot capital to good business opportunities, such as Victoria’s Secret (VSCO), Metaplatforms (META), or Volkswagen (OTCPK: VWAGY). I value MNST stock with a residual earnings framework, anchored on consensus analyst estimates of EPS, and calculate an implied fair stock price of $59.88.

About Monster Drinks

Monster Beverage is a consumer company that develops, manufactures and markets energy drinks. The Company operates three main segments: Monster Energy Drinks, Strategic Brands and Alcoholic Beverages. Notably, Monster Energy Drinks accounts for about 95% of total sales and Strategic Brands accounts for the rest. Alcoholic beverages, as of 2021, do not represent any notable share of group sales. Geographically, more than 60% of sales are made in the North America Region and just under 20% in EMEA. Asia-Pacific and Latin America make up the rest.

With revenues growing well above 10% CAGR over the past 5 years, many investors have viewed Monster Beverages as an international growth story. The company quickly grew to claim over 40% of the global energy drink market, second only to Austria’s Red Bull. As a result, MNST’s stock price has risen from around $6/share at the start of 2021 to over $90/share starting in 2022. This represents a total return of 1,400% and 25% annualized.

Monster Beverages shares its performance

Looking for Alpha

Given these numbers, the company’s stock has been rewarded with a rich growth multiple. As a result, the company’s current P/E >x39 implies that Monster beverage expansion should continue.

MNST valuation

Looking for Alpha

Valuation ahead of fundamentals

However, I want to point out that Monster Beverage is trading at a high price. Especially given rising real yields and falling asset prices in the markets, the MNST has a high P/E vulnerable to a multiple contraction. Additionally, Monster Beverages margins are not immune to rising commodity prices and wage inflation. That said, I see a 30% multiple contraction scenario associated with a 15% EPS reduction less unlikely, which could imply a share price decline of around 40%.

But even if there is no EPS and multiple contraction, it is easy to show that the market is considerably ahead of the analyst consensus. For reference, according to the Bloomberg Terminal as of July 15, Monster Beverage’s revenue in 2022, 2023 and 2024 is expected to be $6.42 billion, $7.08 billion and $7.81 billion. This is a significantly lower CAGR growth than the company’s historical performance. EPS are estimated at $2.34, $3.08 and $3.53 respectively.

From 2018 to 2021, Monster Beverages grew revenue from $3.8 billion to $5.5 billion, reflecting a 3-year CAGR of approximately 13%. During the same period, EBITDA grew from approximately $1.35 billion to approximately $1.85 billion (11% CAGR).

Monster Beverages is virtually debt-free with just $34 million in financial debt and over $2.7 billion in cash and short-term investments. In 2021, cash from operations was approximately $1.2 billion.

Valuation of residual profits

Now let’s look at the valuation. What might be the fair value per share of the company’s shares? To answer the question, I built a residual income framework and anchor on the following assumptions:

  • To forecast EPS, I rely on analyst consensus forecasts available on the Bloomberg Terminal through 2025. In my opinion, any estimate beyond 2025 is too speculative to be included in a valuation framework. But for 2-3 years analyst consensus is usually quite accurate
  • To estimate the cost of capital, I use the WACC framework. I model a three-year regression against the S&P 500 to find the stock’s beta. For the risk-free rate, I used the yield on 10-year US Treasuries as of August 13, 2022. My calculation indicates a fair required return of 8%.
  • To calculate the MNST tax rate, I extrapolate the 3-year average effective tax rate from 2019, 2020, and 2021.
  • For the terminal growth rate, I apply 3.5 percentage points to reflect slightly higher growth (around 1%) than the estimated nominal GDP growth.

Based on the assumptions above, my calculation returns a benchmark target price for MNST of $59.80/share, implying a significant decline of almost 35%.

MNST Valuation Residual profit

Analyst’s EPS Estimates Author’s Calculation

I understand that investors may have different assumptions with respect to required MNST return and terminal business growth. Thus, I am also attaching a sensitivity table to test different hypotheses. For reference, red cells imply overvaluation relative to the current market price, and green cells imply undervaluation.

Sensitivity table Valuation MNST

Analyst’s EPS Estimates Author’s Calculation

Risks for my thesis

Based on the valuation, I argue that MNST is a sell. However, I recognize that Monster Beverage has a proven track record of growing revenue and accumulating value. As a result, the company could reach its stretched valuation within the next 12-24 months. If that happened and the valuation became “reasonable”, I would become more neutral on the stock.

Conclusion

Monster Beverages is undoubtedly a quality company. However, the price is simply too high to justify an above-market return expectation for investors. Especially since many stocks are trading cheap right now, given the fear of recession and slowing growth, I argue that investors can find much better buying opportunities than MNST. Depending on the valuation, I initiate with a sell recommendation. My target price is $59.80/share.

About Myra R.

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