Thursday, November 7, 2013

Took a position in Monster Beverage

Please read the disclaimer here: Enjoy the article, bitches!

In the past few weeks I added Monster Beverage Corp to my portfolio at USD 52.09 per share. In short, I invested in the stock because I think it’s a great business and has huge growth opportunities. I also bought shares in Ebay, DeNA Co and Boardroom limited over the past few weeks. However, I’m a fucking sloth and it would take me just as long to put out an article as it would take a hipster to finish his organic coffee and leave Starbucks. So I can’t promise when I will publish articles discussing those stock picks.

Monster Beverage is incredibly profitable as evidenced by its high return on assets and equity of 22.23% and 31.75% respectively for the 12 months ended June 30, 2013. Management has also grown the company astronomically. Monster Beverage grew revenue and operating profits (after I made adjustments for one-time items) at a compounded annual rate of 14.79% and 19.16% respectively for the 5-year period of 2008-2012. The company has been able to reinvest its profits at a high rate of return as evidenced by the 42.3% returns its earning on the additional equity employed in the business over the 5-year period of 2008-2012. The return on additional equity is an important metric for companies that reinvest most if not all of their earnings. I don’t want management to do weird stuff with my money like building wind farms or sticking it in a bank and jerking off at the 1% interest rate per annum. If you can’t profitably reinvest my money, pay me a dividend so I can go do my own weird stuff like buying all of Julia Sheer’s and Tiffany Alvord’s songs so I can listen to them while driving around the country aimlessly.

Benjamin Graham pioneered the following formula to value growth stocks: Intrinsic value = (8.5 + 2 x earnings growth over the next 7 to 10 years) x earnings per share. You can read more about this formula in this Wall Street Journal article. After adjusting for one-time items and the dilutive effect of stock options, I estimate that Monster Beverage had earnings per share of $ 1.96 for the 12 months ended June 30, 2013. I bought the stock at $52.09. So, after performing some basic algebra with Ben Graham’s formula I find that the company needs to grow profits by 9.04% for the next 7 to 10 years for me to get a fair deal out of the price I paid. Here are my calculations:

52.09 = (8.5 + 2 x G) x 1.96
52.09/1.96= 8.5 + 2 x G
26.58 – 8.5 = 2 x G
18.08/2 = G
G = 9.04%

Obvious side note: G represents growth

Did I get value for my money or did I overpay for the stock the same way shmucks overpay for “socially responsible goods”? Let’s find out. The following excerpt from an article on Yahoo! Finance highlights the growth opportunities of the energy drink market in the United States. You can read the article here.

“At present, energy drinks have the lowest consumption rates of any RTD (ready-to-drink) beverage—a point which reflects the market's relative infancy but also its growth potential. Experian Simmons analysis shows the growth trend of this market, with the incidence of energy drink usage among adults rising from nearly 13% in 2006 to 17% in 2012. In addition, there is a modest segment of heavy users: 5% of adults consume energy drinks 5-7 times per month and less than 2% drink energy drinks 10 or more times.”

As you can see, there are a lot of opportunities for energy drink makers to grow their business by increasing the number of times customers drink energy beverages in a given period. For the quarter ended June 30, 2013, Monster Beverage only generated 22% of its gross revenue internationally, giving the company a lot of room to grow by continuing to build market share outside of the United States. So, yes a 9.04% growth in revenue and profits for the next 7 to 10 years is certainly within the realms of possibility. I know that revenue growth has slowed down to only 6.4% for the second quarter ended June 30, 2013. But I’m a long-term investor and short-term slowdowns don’t worry me. It’s the big picture I’m concerned about and it looks promising for Monster Beverage.

Is there a chance that I overestimated the company’s growth prospects and made a mistake of not requiring a margin of safety? Sure. But if the stock ever experiences a sharp correction, then I will be like a rich China woman in a Louis Vuitton store and load up on the stock (assuming that the business fundamentals remain intact). That’s just how good I think the business is and that’s just how I roll, bitches. Thank you for reading, stay rational and take care.

Side note:  Some if not all of the figures in this article are calculated by myself and may differ from the actual figures that you may get using conventional formulas. Please let me know in the comments section if you’re interested to know how I calculate any of the figures in this article.

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