In this segment fromMarket Foolery, host Chris Hill enlists the help of Motley Fool analysts Aaron Bush andDavid Kretzmann to pore over the most recent results from Monster Beverage (NASDAQ: MNST).
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Thanks in part to rising market demand, and in part to a critical deal with Coca Cola(NYSE: KO), the energy drink leaderis getting its products into the hands of more and more consumers. Where will the company turn next to extend its incredible track record?
A full transcript follows the video.
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This podcast was recorded on March 2, 2017.
Chris Hill: Shares of Monster Beverage up14% this morningafter strong sales in the fourth quarter. David,a lot of that is going to the bottom line, too. Just in terms of this latest quarter, theirprofits look good.
David Kretzmann:Energy drinks are hot sellers, and I think Monsterstill holds the honor of being the top performing stock over the past 20 years. I looked it up,any guess over the last 20 yearshow much that stock is up?
Hill:Wait a minute,I'm sorry, it's the number one stock for 20 years?!
Kretzmann:I know this was true last year, andbased on the numbers I pulled up, I don't think there's any other stock that'sovertaken that mark.
Hill:I can't even begin to guess.
Kretzmann:238,850% over the past 20 years.
Bush:What?! How? That's ridiculous!
Kretzmann:Right now, Monster istrading at about $48 a share. 20 years ago,it was trading at the equivalent of $0.02 per share, sojust a couple of pennies could have but you a share. There have beennumerous splits and stuff, but it's pretty incredible performance. Energy drinks have done wonders for the companyand for investors who managed to hang on through that.
Bush:That'sridiculous. I don't follow this as close as David does,but I have to say,every time that I think that acompany is decelerating for good,or that things are going to slow down,as soon as I think that,the next quarter they just reaccelerate all over again, and raise guidance.Coca-Cola.
Kretzmann:Yeah,that really is the story with Monster. A couple years agoCoca-Cola took a stake in Monster.Coca-Cola basically said, "We'redone competing in the energy drink space. We'regoing to give Monsterthe few energy drink brands we have." And now,Coca-Cola owns about 17% of Monster. Over the past couple years, each quarter, Monster willtransition over to Coca-Cola'sbottlers and distributors. This quarter, theytransitioned to Coke's distributors inBrazil, Costa Rica, Panama, so,increasing that Latin American presence. They launched inChina, in a couple areas likeShanghai, Shenzhen, a few others. They'reexpecting to continue that expansion into China and India in 2017. So this is really a story of Monstergetting their product in front of more people. Once they do that,whether is in Africa, the Middle East,Asia, Latin America, or even in the U.S., they manage to sell more. It'sjust a very attractive business model. Right now, they have $600 million in cash, no debt. They'reproducing well over $100 million in freecash flow each quarter. So it's just a very solid, high margin business. It's beenincredibly well run by Rodney Sacks, who's beenCEO since 1990. He's been a big piece for thatincredible performance of the stock and the company. They also aretrying to get into this super soda category. I hadn't realized thatMountain Dew commands a lot of presenceand a lot of market sharein that category.
Hill:Whatconstitutes super soda? Highlycaffeinated?
Kretzmann:It'shighly caffeinated soda. It's not strictly an energy drink,it's not strictly a soft drink. It's somewhere in between there. It's justa little bit more radioactive, I guess. But Monster, late last year, they launched Monster Mutant, which really does lookradioactive, it's this really food color-y green and red color. Butapparently it's selling pretty well initially. Then, you also have lines like Java Monster, which is the coffee drink that competes more with theStarbucksprepared beverages.
Hill:Forthose of us who don't get enough caffeine in our coffee,we can just grab a Monster.
Kretzmann:Andthat's the thing. You would think that with health concerns and the headwinds against soda,you wouldn't expect energy drinks to be doing pretty well. But between 2011 and 2015, the energy drink category in the U.S.almost doubled. This is actually a categorythat continues to grow. You have those tailwinds behind Monster,they're trying to get more market share fromRed Bulland become the dominant energy drink brand in the U.S.and the world. And now with that they have Coca-Cola'sdistribution model,that whole system, that should continue to play to their advantage. I think there are still a lot of reasons to like this company going forward.
Hill:Andthat's the thing. You think about Coca-Cola, which is,in some ways, the quintessentialAmerican brand. And yet, from a business standpoint, theoverwhelming majority of sales of Coca-Cola productstakes place outside of the United States. And when I look at Monster Beverage,and in this latest quarter, international salesmake up just a little bit north of 25% of revenue. Even taking into account the gob-smacking stock performanceover the last 20 years,I just look at that and go, "Wait a minute, is itunreasonable to think that they can double international sales?" No,I don't think it is.
Kretzmann:Yeah,at least. Looking over thenext 10 years,I think you see those tailwinds behind Monster's back. Having Coca-Cola's wholedistribution system,that should help accelerate that transition and that growth internationally for the company. And then, there's still room to gainmarket share domestically against Red Bull andsome of the other brands that might be nipping at Monster's heels. So, yeah,I think there are still a lot of reasons to like where Monster can go over the next decade.
Bush:And one thing that stands out to me is, five years ago, their grossmargin was in the low 50%. Now, it's in the mid 60s. I think a big part of that came when the Coca-Cola dealemerged, and all that distribution,leveraging all those costs, has reallypushed up the gross margin. But because they're still in growth mode,not all of that yet has come through and shown inoperating margins and free cash flow margins. Even if revenue growth tapers down, there is still going to beplenty of room for the earnings growth to pick back up and keep the stock moving forward, which is justfascinating to me.
Hill:Have you had it?I've never had one of their drinks, have you?
Bush:I have, yeah.
Bush:It'sa lot of caffeine.[laughs]
Kretzmann:I don't drink the actual Monster drinksanymore, they're just a little too sweet and I'm like,this just can't be good for my body. But the Java Monstersaren't badif you like iced coffee,it's pretty similar to a Starbucks frappuccino or something. So, I'll go with a Java Monster,maybe a couple a year, if that.
Bush:Wehave to try the super sodas, see if we change colors or something.[laughs]
Kretzmann:See if we survive, yeah. Youcould probably run 10 miles after that.
Hill:One of the thingsI love about companies like thiswho are performing like this is,it just makes me smile for all the times that I hear analysts talk about the growth in organics. "Look at the health trends, we're all getting healthier!" It's like,not all of us are getting healthier.
Kretzmann:Monster is there to fill that gap, yeah,and they've done a good job at it.
Aaron Bush owns shares of Starbucks. Chris Hill owns shares of Coca-Cola and Starbucks. David Kretzmann owns shares of Monster Beverage and Starbucks. The Motley Fool owns shares of and recommends Monster Beverage and Starbucks. The Motley Fool recommends Coca-Cola. The Motley Fool has a disclosure policy.