mcintire investment institute - uvacollab : gateway · soda (hans) changed its company’s name and...
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M c I n t i r e I n v e s t m e n t I n s t i t u t e 1
MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA
Zixing Chen, Chuxi Sun| 7 February 2013
M c I n t i r e I n v e s t m e n t I n s t i t u t e
AGENDA
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BUSINESS OVERVIEW
THESIS POINTS
MARKET MISCONCEPTIONS
VAR
RECOMMENDATION
RISKS
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COMPANY OVERVIEW
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• Founded in 1935 and Southern California-based, Hansen Natural Soda (HANS) changed its company’s name and symbol to Monster Beverage Company (MNST) on January 5, 2012
• Develops, markets, and distributes energy drinks, fruit drinks, iced teas, and still water both in the U.S. and overseas
• #2 energy drink behind Red Bull
• Operates in two segments: Direct Store Delivery (95.3%), whose principal products comprise energy drinks, and Warehouse (4.7%), whose principal products comprise juice based and soda beverages
• Promotes its products through the sponsorship of over 200 athletes
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STOCK OVERVIEW (NASDAQ: MNST)
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Price: 48.33 P/E (ttm): 26.55 EPS (ttm): 1.82 Market Cap: 8.28B 52wk Range: 39.99-83.96 Avg Vol: 1,788,000
Monster Beverage Corporation (MNST)
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THESIS POINTS
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q Decelerating margins growth rate
q Overhyped acquisition rumors q Limitations of well-defined consumer
marketing q Perceived health concerns and international
expansion uncertainties
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• Product concentration and lack of innovation
• Vulnerability to market saturation
• No real clear
differentiation between the products or their target markets among its nearly 30 different flavors
CONCENTRATED PRODUCT PORTFOLIO
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ENERGY DRINK MARKET LOSING MOMENTUM
• MNST’s 11.2% YoY growth in the past 4 weeks is off the pace of 14.3% YoY sales growth (ttm) o Monster Beverage Corp 19.6% → 10.5 % o Red Bull 15.9% → 18.1% o Rock Star 2.4% → 2.5% o Coca-Cola Co. 7.4% → 6.6% o Pepsi Co. -12.6% → -17.8%
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• Energy drinks’ YoY growth shows signs of deceleration
Energy Drinks’ YoY Growth (2001-2011)
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MISCONCEPTION #1 ENERGY DRINKS’ PROFITABILITY GROWTH IS EXPLOSIVE
“The U.S. energy drink market has reached a saturation point much quicker than expected.”
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- Jonas Feliciano, Beverage Analyst at Euromonitor International
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INVENTORY GROWTH SURPASSING REVENUE GROWTH
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• Inventory growth surpasses revenue growth • Wasted stale inventory hurts profitability
• 4th quarter's revenues continuously follow a downward trend
o Less winter sports and sponsored games
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3/4 MISSED ESP PROJECTIONS
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Monster Beverage Corp. YoY Revenue Growth
• Growth is slowing down • MNST continuously missed analysts' EPS expectations
in the last four questers
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STAGNANT MARGINS AND WEAK OPERATING CASH FLOW
• Stagnant operating margin caused by high raw materials costs and increased international expenditures
27.49%
17.12%
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UNJUSTIFIED PREMIUM VALUATION
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Ticker P/E P/S P/B P/FCF D/E EPS
DPS 15.55 1.58 4.06 37.50 1.19 2.92 KO 19.45 3.52 5.05 54.16 0.99 1.92
MNST 26.15 4.08 9.71 28.93 0 1.82 PEP 19.32 1.71 5.24 51.79 1.30 3.75
• MNST is currently trading at 26.6x earnings, 5.8x sales, and 17.4x EBITDA
• A 25.3% growth rate in the past 5 years suggests unrealistic expectations for growth and outperformance
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MISCONCEPTION #2 MNST IS THE NEW SBUX
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• Highly developed brand, logo, copyrights, and trademarks
• Physical stores, service, customized products
• Product diversification with the recent acquisition of Evolution Fresh Juice
• Markets its products
primarily directly to retailers
• No patents • Pre-packaged products • Dependence on suppliers
for manufacturing and packaging products
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THESIS POINTS
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q Decelerating margins growth rate
q Overhyped acquisition rumors q Limitations of well-defined consumer
marketing q Perceived health concern and international
expansion uncertainties
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IS MONSTER FACING A BUYOUT?
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• Rumors of a possible takeover has been spread around since 2007
• HANS’s price peaked but soon slumped over the next 4 quarters
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IS MONSTER FACING A BUYOUT?
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• Similarly, MNST’s price peaked in Jun 2012 but fell significantly in the following two quarters
MNST’S Share Price, 2011-2013
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RISKS OF ACQUISITION
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• MNST went up 63% in value during 2012. While MNST’s size (especially by book value) makes it an attractive buyout candidate, a close to $10 billion acquisition cost would make this deal the most expensive one in the industry’s history
• FDA Investigation and increased calls in Congress can
inspire regulatory action and would make a buyout highly unlikely to occur in the next 3 months
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THESIS POINTS
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q Decelerating margins growth rate
q Overhyped acquisition rumors q Limitations of well-defined consumer
marketing q Perceived health concern and international
expansion uncertainties
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LIMITED CORE DEMOGRAPHICS
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Age and market discrimination continue to be a problem for the energy drink market.
Current Advertising: • Sports, parties • Selling Lifestyle • Premium access • Celebrities
endorsement
Targeted Audience: • Athletes • Male, aged 14-26 • Extreme sport fans,
gamers, hip
Challenges: • Missing new markets • No use of mainstream
media • No top-of-mind
awareness • Stigma attached to
energy drinks
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MISCONCEPTION #3
MNST RUNS HIGHLY SUCCESSFUL MARKETING CAMPAIGNS
• Red Bull currently spends approximately 30% of their worldwide sales on marketing and advertising which equates to $600 million
• Red Bull created the non-traditional content marketing strategy since early 1980s and has long been in the game of marketing to extreme sports
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• Monster promotion spending climbed to 23 %, or approximately $105 million, in 2012
• Monster entered the market after Red Bull, discounted their product, and adopted similar marketing strategy
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THESIS POINTS
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q Decelerating margins growth rate
q Overhyped acquisition rumors q Limitations of well-defined consumer
marketing q Perceived health concern and international
expansion uncertainties
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CONTINUED HEALTH AND SAFETY CONCERNS
• In recent years, energy drinks have caused more and more ED visits
• FDA routinely attempts to push for tighter restrictions on the marketing of energy drinks to children and teens
• Negative effect on consumer perception outweighs potential for increased government regulation
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Energy Drink-Related Emergency Department (ED) Visits
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CONTINUED HEALTH AND SAFETY CONCERNS
• On Oct 22nd, 2012, FDA started investigating reports of five deaths that might be associated with Monster Energy Drinks.
• This news caused a 13% drop in the Monster’s share price.
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MNST’S Share Price, Oct 22nd, 2012
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CONTINUED HEALTH AND SAFETY CONCERNS
• Although the FDA have terminated the investigation, it still kept an close eye on the company’s performance and health issues that were possibly caused by energy drinks.
• The company need to resolve these health concerns to bring back positive investor sentiment.
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UNCERTAINTIES IN GEOGRAPHICAL EXPANSION
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• Competitors like Coke, Pepsi, Red Bull, and Starbucks all have established a substantial international presence
• Globally speaking, the Red Bull has almost half of the market share, especially in some Asian countries where Monster have not entered
• Concentrated product portfolio might be a significant weakness
Global Share of Energy Drink Market
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UNCERTAINTIES IN GEOGRAPHICAL EXPANSION
• High shipping expenses and other cost pressures outside the U.S. threaten profit margins and operating performance
o Example: product damage associated with the rollout into Japan and South Korea hurt Monster's international margins in Q2 of 2012
• Red Bull is banned in some countries due to the ingredient Taurine such as Denmark, France, and Norway. And Taurine is a key ingredient for energy drinks. Therefore, it is reasonable to say that Monster might face the same situation when it expands to foreign markets
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THESIS POINTS
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q Decelerating margins growth rate
q Overhyped acquisition rumors q Limitations of well-defined consumer
marketing q Perceived health concern and international
expansion uncertainties
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VAR
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Survey: Energy Drink vs. Energy Drinks Alternatives Findings: (Participants are random sampled UVA students ) • Preferences: Coffee drinks > Energy Drinks > Sports Drinks > Soda
• 76.5% of participants consume Red Bull most often, 17.6% consume Monster most often, and 5.9% chose Monster XXL as their favorite energy drink
• 58.3% of participants drink caffeinated drinks “feel awake in general,” 25% chose “to focus with studying,” and 12.5% of participants “do not drink energy drinks”
• 100% of participants are aware that there are health risks associated with energy drinks, while 58.3% of them “try to find healthier alternatives to energy drinks”
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VAR
“Energy drinks have become increasingly popular these days… but there have been a few complaints toward them… ”
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- Customer Service at Walmart, Charlottesville
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VAR – ONLINE CUSTOMER REVIEWS
• “I've been drinking this over a year, until I got arrithmias and anxiety, and
panic attacks. It's not worth the risk!” • “Contains the artificial sweetener 'sucralose', which causes me migraines
and makes me lethargic. There should be a sucralose warning on the front label!”
• “There are always loose cans in the box, there are always dented cans. I refused one delivery due to the cans open and the box soaked, falling apart.”
• “Case arrived damaged, only offered a return of item, are they joking?” • “This box was so damaged it lost the box it was mailed in and was leaking
from several cans of the product. This was the worst I have ever received a product over the 10 plus years.
*Taken from Amazon.com 33
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CATALYSTS
• Inflating commodity costs and government oversight limit long-term growth
• Lawsuits damage the company’s public image and influence market sentiment
• The outlook for MNST’s 10-K is bearish
• Too many short, mid, long-term headwinds
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
RISKS
• Development of innovative strategies to differentiate its brand
• Successful market penetration and international expansion
• Still an appealing buyout target
• Relatively strong financial statistics
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
RECOMMENDATION
• Immediately initiate short position at 0.75%
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
APPENDIX 1 SWOT ANALYSIS
Strengths: • Market leadership – S&P 500 • Strong and above-industry-average
growth • No long term debt • Strong, fresh, and fashionable brand
identity Weaknesses: • Less financial resources than
competition • Lack of innovation • Reliant on small product base • Inexperience in the international
market • Lack of patent on its recipe means
low market barrier
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Opportunities: • New product Peace Tea adds more
revenue stream • Celebrities marketing and advertising • Possibility of being bought out by KO or
PEP • Consumer recognition though
sponsorship like sport events
Threats: • Government regulations • Consumer awareness of health • Frictions preventing its buyout • Consumers not accepting its product in
emerging/new markets • Dependence on energy drink segment • Enormous industry product competition • Changes in consumer preferences