Monster Beverage Corporation (MNST) Part 1
This post is part one of the research I have done on Monster Beverage. After reading about Monster in an online article I got interested and had to do my own research to see if the company was a good investment according to the principles of Compound Investing. In Part 1 of my analysis we will go through the quantitative and qualitative analysis.
1.1 Quantitative Analysis:
In this first step, based on three simple metrics, we will very quickly check if Monster is worth analyzing further.
Return on Equity
At first we will look at the return on equity (ROE). The ROE of Monster Beverage over the past ten years has been at 31% on average. Except for two years during this period it even has been consistently over 20%.
The next step of our analysis is looking at the earnings. Aspects that are important to us at this stage are the consistency and the 10 year compound annual growth rate (CAGR) of the earnings.
The CAGR of the last 10 years is 16.39%. To determine the consistency of earnings it is best to look at a graph. As you see in the picture titled Earnings Growth of MNST, earnings grew very consistently. Monster Beverage was actually able to increase their earnings each year during the entire ten year period. Also the earnings show a strong upward trend.
It is also necessary to look into the debt burden of a company. The long term debt is the most important metric to consider. In the case of Monster Beverage there is no long term debt at all, which is very good. Actually the company hadn’t had any debt since 2010 and no long term debt since 2006.
As Monster Beverage meets all our requirements in the quantitative section of the analysis, we can now move on to look into the business model.
1.2 Qualitative Analysis:
Type of Business
The most important aspect in this part of the analysis is to identify the type of business of Monster Beverage. We are looking for a monopoly type business. That means the company has some measures to shield themselves from competition, so that they don’t have to compete by lowering their prices. In the case of Monster Beverage the strong brand definitely acts as a shield against competition. Monster is very active as a sponsor, especially in extreme sports, to further strengthen their brand. Another aspect that came to my attention when I was buying different tastes of their drinks to try them for myself, was the placement of their products. In the supermarket their drinks were exactly on the height of my eyes, while all the other brands (except Red Bull) were placed in the lower shelves. In some stores Monster drinks even had their own fridge which was formed in the shape of a big can branded with the Monster logo. These findings further strengthen my conclusion, that Monster has a strong brand name product and is therefore to be categorized as a monopoly type business.
The capital requirements of a company are also a key determinant of the profitability. If a company has to allocate most of their earnings to the maintenance of factories and equipment or to expensive and ongoing research and development that doesn’t produce secure outcomes, they lose the ability to reinvest their earnings into new business opportunities or the expansion of their operations. In our case the capital requirements are extremely low, because Monster has outsourced the entire manufacturing process to third-party bottlers and co-packers. They don’t have to maintain factories of their own and are able to reinvest the earnings into the expansion of the business. Also there is no need for expansive research and development, as energy drinks are a fairly simple product.
Retainment of Earnings
Monster was able to reinvest their entire earnings back into the expansion of the business, because they never paid a dividend (which is a good thing). When talking about the retainment of earnings, it is also important to test If the retained earnings have been employed in a profitable manner and if the price of the stock responds to the value added to the business. The stock price definitely responded well to the increased value of the company as it has increased steadily over the past years. To see how profitably the retained earnings have been employed by the management we will put the total retained earnings per share in relation to the increase in earnings per share over the last ten years. First of all we have to calculate the total EPS for the last ten years, which are 9.03$. In this case there is no need to differentiate between retained earnings and earnings paid out, as there was no dividend. Otherwise it would be necessary to subtract from the total EPS the part of the EPS which was paid out over the years. The increase in EPS over the same period has been 2.17$. This means Monster Beverage invested 9.03$ a share to gain an increase of 2.17$ a share, which means they invested their retained earnings at a return of 24% (2.17$ / 9.03$ = 0.24 = 24%) So we can conclude, that the management definitely has the ability to profitably employ retained earnings as a return of 24% is exceptional and difficult to get elsewhere.
Monster Beverage is a great company, that met all the requirements in both sections of the analysis. Their product is used up quickly, very simple to produce and never goes obsolete. These properties coupled with the low competition and their strong financial situation make for a great investment. In part 2 of the research on Monster Beverage we will see at what price the stock is a good buy. Feel free to leave a comment and I hope you enjoyed reading!