Monster Beverage Corporation (MNST) Part 2
In this second part of my analysis of Monster Beverage we will estimate at what range of price Monster’s stock is likely to be at ten years from now. Normally these types of estimation don’t hold much value. However in our case it is different, because we are focusing on a special kind of company. As we have seen in part one of the analysis, Monster has very a stable earnings growth as well as a solid monopoly type business model. Under such circumstances an estimation of future prices, based on the earnings development, has a much higher predictive value.
Projection of future stock price
First of all we will calculate the future per share equity value of the stock. Therefore we need the present per share equity value and the rate at which Monster was able to grow their equity in the past. The average growth rate of per share equity over the last ten years was 19.96% and the present per share equity is 6.64$. In order to calculate the expected future per share equity value we simply have to compound 6.64$ for ten years with an interest rate of 19.96%. That gives us a future per share equity value of 6.64*(1+0.1996)^10 = 40.97$. The next step is to calculate the future earnings per share, by multiplying the future per share equity by the return on equity. As we do not know what the ROE will be exactly in the future, we use the average ROE of the last ten years, which in this case is 31%. So the future EPS are 40.97$ * 0.31 = 12.7$. Now we can multiply the future EPS and the average P/E-ratio of the last ten years (33) to calculate the future stock price. The future stock price is 12.7$ * 33 = 419$.
So what does this calculation tell us about the valuation of the stock today? At the time of writing the Monster stock is traded at 58.70$. That means, if we buy the stock today at 58.70$ and expect the price in ten years to be at 419$ then our compound annual growth rate will be 21.71% p.a.. Now we are able to compare this rate of return to alternatives and then make a decision. It is important to remember that Monster Beverage also met our requirements in the first part of the analysis. A stock that offers a return of 20% or more according these calculations, but does not meet the quantitative and qualitative requirements would not be interesting to us. That is the case, because the above calculation only has predictive value for monopoly type businesses with stable earnings growth and the ability to compound their earnings.
All in all we can conclude that Monster Beverage definitely is great opportunity and that a price around 58$ would give us a return of approximately 21% over the next years. I hope you enjoyed reading. If you have any questions or criticism feel free to leave a comment or use the contact form.