Last week, I wrote about missed opportunities and their lasting impact on me. Actually, they hurt me more and stay with me longer than realized losses where I have taken my lessons learnt. Today, I want to discuss one of the most successful – if not even THE most successful – stock(s) of the last quarter-century. Nearly self-explanatory, this was a somewhat surprising business development that many (including me) have missed. Is there maybe a second chance?
Summary and key takeaways from today’s Weekly
– The success story of energy drinks, respectively the stock of Monster Beverages is quite amazing, even surpassing the already incredible development of Apple’s stock.
– However, I think that – despite being in a still growing niche market – the stock is too well covered and priced too richly.
– That’s why I managed to find an alternative – a second chance for a multi-bagger? My Premium PLUS Members will find out.
If you talk about the most successful group of stocks in general (or a single stock in particular) over the last ten, twenty or twenty-five years, the answer will more often than not involve a tech company.
What comes to one’s mind immediately, likely is one of the following success stories:
- Apple (ISIN: US0378331005, Ticker: AAPL)
- Amazon (ISIN: US0231351067, Ticker: AMZN)
- Netflix (ISIN: US64110L1061, Ticker: NFLX)
- feel free to think of more
It should be out of any question that an investment in one (or all) of them made an investor pretty rich – assuming the shares were bought and held. Even a 1,000 USD bet would have multiplied into several tens of millions pre-tax!
Honestly, did you also place your guess on one of these?
At least when we look at the 25-year charts, there seems to be a clear winner – Apple with its nearly 139,000% share price performance (more than +1,380x).*
* without dividends – Apple is the only one of the pack that has ever paid dividends
It seems nearly impossible to even think about that there has been a more successful stock in the same timeframe.
And not only slightly more.
If thought for a second, one could start to imagine that there maybe was a then ultra-speculative, pre-commercial biotech stock that hit the jackpot and multiplied in a comparative order of magnitude. But it is really difficult to imagine, as Apple seems to have been a once in generation or even once in a lifetime opportunity.
What if I told you that there is indeed a company with a straightforward business model that makes all these three stocks look like they went sideways for a quarter-century (or at least the non-Apples)?
Not only that.
The business only operates in a niche and it did not even invent anything new!
Here is the same chart, but including the stock of one more company:
Did you know that Monster Beverage (ISIN: US61174X1090, Ticker: MNST) – a company selling niche sugared “energy drinks” – made more than twice the performance of Apple‘s stock since 1998 – the time when Apple was in deep trouble and at risk of getting out of business?
This is simply mind-blowing!
Today, I am going to look back at the history of energy drinks and the development of the two best known brands from this niche – besides “Monster Energy”, there is also the Austrian market leader and privately held “Red Bull”.
This story led me to another company where I see similarities and a more than reasonable chance for its stock to become a multi-bagger over the next years – if it doesn’t get acquired prior (which I hope won’t happen, but it puts a quasi-floor under the stock). The business is currently having some challenges, but they’re solvable.
Announcement: My second Membership starts!
Herewith, I’m happy to announce that I am starting a second membership!
To kick it off, I’m featuring in my next research report a founder-led business with the potential of becoming a multi-bagger.
This investment idea will be exclusive to my new Premium PLUS Members – the report will be available next Saturday, 29 April 2023 in the newly created Premium PLUS Member’s area (as usual, I’ll send an email alert).
It’s important for me to stress that nothing will change for Premium Members (also not the price in this inflationary environment!), except that there’s a chance to upgrade towards a package with additional investments ideas. Premium Members will continue to receive eight exclusive investment ideas p.a.
Launch of new Membership (Premium PLUS)
My new Premium PLUS Membership includes everything that Premium is already offering, plus:
– 3 additional research reports p.a. of the same length, in the same format and with the same high-quality research
– the profile of my chosen investment ideas will be slightly different, more towards higher-chance candidates for
–> long-term multi-baggers (multiplying several times)
–> quick (< 1–2 years) +30–50%, resulting from special situations or potential acquisition targets
My aim is to find companies that at the minimum have a chance to 3x organically from the underlying business, ideally over 3–5 years.
Rest assured that I won’t present you any binary bets, but strong business models, ideally founder-led, with strong financials and an undervaluation. As you are used to from me, I will place a high weight on risk management. However, it can happened that certain investment ideas are more volatile and / or of slightly less (but sufficient) liquidity, due to their potentially smaller size and / or less free float.
My new Premium PLUS membership costs only 399,– EUR p.a.
If you subtract the 99,– EUR for the Premium Membership that is fully included, you have only 100,– EUR per investment idea. If only one of the three ideas p.a. becomes a multi-bagger, you will smile over this price.
Self-explanatory, if you’re already a Premium Member, then it will cost you only the difference of what’s left in your current membership (until it would prolong) to upgrade. By upgrading, your subscription will start with new twelve months.
The success story of energy drinks
Even if you’re not a consumer (like me), there’s a decent chance that you already have heard of “energy drinks”. Whether you’ve seen them in supermarkets or in ads, their marketing efforts enabled the brands to be nearly omni-present.
But what are energy drinks?
Their marketing departments will tell you that they are caffeinated soft drinks with herbal mixtures, plant-based ingredients and even certain vitamins to boost your performance and attention – whether as an athlete or to stay up all night.
Sounds healthy, doesn’t it?
What they won’t tell you is that they are highly sugared
poisons consumables. The famous original green Monster drink has 11 grams of sugar per 100 ml (around 3 ounces). This is even minimally more than a Coke has. A can of half a liter contains insane 55 grams!
The recommendations for daily sugar consumption are around 20–25 grams – in total over a whole day!
The WHO – debatable or not – issued the following recommendation on their site:
A new WHO guideline recommends adults and children reduce their daily intake of free sugars to less than 10% of their total energy intake. A further reduction to below 5% or roughly 25 grams (6 teaspoons) per day would provide additional health benefits.World Heath Organization – “WHO calls on countries to reduce sugars intake among adults and children” (see here)
With such an energy drink, you load up 12–13 teaspoons of sugar.
I hope you’re awake reading this without a sip.
Anyway, this niche beverage has made its way into the everyday lives of many.
Even to such an extent that health professionals are warning about increasing health issues. For example, senior author Sara N. Bleich, PhD, from the Department of Health Policy and Management, Harvard T.H. Chan School of Public Health, says:
“The increasing use of energy drinks, especially among young adults, is cause for concern and warrants continued study and surveillance. Although the beverages are marketed to reduce fatigue and improve physical and mental performance, frequent consumption of these highly caffeinated and sugary beverages has been linked to negative health consequences.”Science Daily (see here)
Though energy drinks have less caffeine than coffee per 100 ml, higher drunk volumes, especially among younger consumers, according to the study of Science Daily, increase “the possibility that individuals will engage in risk-seeking behaviors, experience mental health strains like increased depression, and/or adverse cardiovascular effects like increased blood pressure”.
Then you have also the high sugar content that carries its own risks.
If you also pour in alcohol – not uncommon – then you have a super-mix for potential disasters, especially factoring in overconsumption of then “sweetened” alcohol that kicks in only later. However, these drinks are popular. That’s why health authorities have put an eye on energy drinks.
Just for starters. But that’s it from a health perspective.
Energy drinks were introduced to US markets in 1997. Their roots, however, are reaching back to the 1970s and to Thailand (see here).
Maybe you know the famous story of Red Bull founder Dietrich Mateschitz (who unfortunately died last year). During a business trip, Mateschitz became aware of the market for (rubber-tasting) stimulant drinks in Asia which inspired him to make a business out of it.
So he acquired the license rights to the Thai energy drink “Krating Daeng”, adapted the recipe to Western tastes and founded the company Red Bull together with the founding Yoovidhya family that still holds 51 percent of the company’s privately held shares. According to “Forbes”, they are the second richest family of Thailand.
Red Bull, today is not just a pure energy drink producer.
It’s a marketing imperium that was founded in 1984 in Austria by Mateschitz, making him with time the by far richest Austrian. The famous can with the two fighting bulls was introduced in 1987 in Austria, in 1994 in Germany, in 1995 in the UK and in 1997 in the US.
In 2022, more than 11.5 bn. Red Bull cans were sold worldwide. Sales were 9.7 bn. EUR in 2021 (see here).
Today, this niche market is still growing by some 10–15% p.a. and thus faster than the whole beverage market. Niche, because despite their success story, energy drinks are just less than 1% of the total non-alcoholic beverages market. This segment is attractive due to higher prices per liter.
Any wonder, Monster regularly has operating margins in excess of 30% (more in the next section)?
As you can see from the following graphic, Red Bull and Monster together dominate the market in a quasi-duopoly, together reaching nearly three of four consumers.
Recently, the energy drink brand “Bang” filed for bankruptcy. Though not listed in Statista above, it is said that they were the number three in the USA, recently, even higher ranked than Rockstar and Reign. Monster is said to have interest in acquiring Bang (see here).
According to newer data from Nielsen, over the twelve weeks prior to the end of March 2023, Monster even overtook Red Bull, reaching a market share of 37.4%, compared to 35.1% for the Austrians. They are followed by Celsius, Rockstar and Bang (see here).
The whole market for energy drinks grew by nearly 15%, of which 9.2% was pricing and the rest higher volumes sold.
Red Bull and Monster dominate this sphere.
Due to Red Bull being a privately held company, in the next section we are going to have a deeper look into the development and the business model of Monster Beverage.
Does it qualify for an investment in this growing market?
The success of the Monster Beverage stock
As shown in the intro section, the stock of Monster Beverage over the last 25 years achieved double the share price appreciation of Apple’s stock.
Interestingly, while Red Bull was founded in 1984 with the aim to sell energy drinks, Monster is a way older company. It has been in existence already since the 1930s where the founders first sold non-pasteurized, i.e. fresh, natural juices. Only in 1977, a descended of the founder Hubert Hansen, also introduced shelf-stable pasteurized juices as well as juice blends and created the company Hansen Foods.
With time, also different sodas and later energy drinks were taken into the lineup. In 2002, the original Monster Energy Drink was brought to market.
Hansen expanded its “alternative” beverage business, focussing on energy drinks. Finally, in 2012, the company changed its name from “Hansen Natural Corporation” to “Monster Beverage Corporation”. In 2015, they acquired various energy brands and finally disposed all non-energy beverages.
Today, with a 2022 acquisition, Monster is also expanding into alcoholic beverages.
Now, some business performance numbers.
- net sales in 2000 were 71.7 mn. USD
- net sales in 2022 were 6.3 bn. USD (Red Bull had around 10 bn. USD in 2021)
–> That’s +87x or a compounded growth rate of 22.5% p.a.
- net income in 2000 was 3.9 mn. USD (margin of 5.4%)
- net income in 2022 was 1.19 bn. USD (margin of 19%)
–> That’s +304x or a compounded growth rate of 29.7% p.a.
Keep in mind that these growth rates were achieved over 22 years!
If you’ve ever searched for an example of a beast (or monster, I should say) of a compounding business – here you have one.
I couldn’t find a market cap from the year 2000, but the 2004 annual report states that there were at that time 10.9 mn. shares outstanding. The highest closing price during 2004 was 36.41 USD.
This gives us a ballpark number for the market cap of then around 400 mn. USD.
If you look at the chart today, you see that at the end of 2004 / the start of 2005, the stock was split-adjusted priced at ca. 0.40 USD per share.
A nice 100-bagger that everyone dreams about!
If we go back to the end of 2000 / the start of 2001, the split-adjusted price was even just around 0.04 USD.
Or in other words, in these four years alone, the stock of Monster (Hansen Natural back then) was already a ten-bagger!
And a thousand-bagger until today!
We know now that the business is operating successfully in a still fast growing niche and that its stock had a phenomenal run.
But what exactly is the business model? It’s really straightforward.
Just like Coca-Cola (ISIN: US1912161007, Ticker: KO) that is also the biggest shareholder of Monster with roughly 20%, Monster has a very capital-light business model. Capital-intensive tasks like bottling and packing are sourced out.
These beverage companies focus on selling their formulas and marketing. That’s also why their balance sheets are rather slim, but margins and capital returns so high.
You see that Monster constantly has capital return ratios in the double-digits:
Also, if we look at
- gross (usually above 50%)
- operating (usually above 30%)
- and free cash flow margins (usually above 20%),
we have amazing results:
The last years 2021 and especially 2022 were challenging, due to high inflation, in particular energy, packaging and transportation costs. That was not a company-specific problem, but industry-wide challenge.
That’s why margins tanked.
But these companies themselves pass on these price hikes to the customers with time, hence higher margins should return, soon.
Over the last ten years, Monster tripled its sales, while free cash flows could be increased by a factor of temporarily more than 4x – before the cost pressure hit. But as said, these should be solvable and only temporary issues.
But what about the valuation of this business?
Monster has a comfortable net cash position of 2.6 bn. USD. That’s about 5% of their current market cap. The enterprise value (EV) hence is 56.6 bn. USD.
So far, so good.
But the free cash flow generation is subdued at the moment. In 2022, Monster only posted a weak FCF of 700 mn. USD – FCF margins nearly halved from 20% to just 11%. Usually, in the past Monster has been a great cash generation business. You see on the next chart that operating cash flow (black) has usually been higher than net income (blue) – lots of profits could be converted into cash!
In the last two years, especially in 2022, this relationship tilted massively.
The reasons were first and foremost way higher inventory levels – higher inventories means higher stocks of unsold goods, hence less cash generated.
If we put the lousy 700 mn. USD of FCF against the current EV, we get an EV / FCF ratio of 80x. That’s obviously very expensive, but below potential. Hence, I would take rather normalized FCF margins and simulate this process with a “virtual” result for a more realistic potential of the business. Then, with a 20% FCF margin and around 1.4 bn. USD of FCF, the EV / FCF ratio halves to 40x – that’s still pretty pricey for me.
High ratios are given to fast growing companies as more growth is expected (and often already baked into the price).
The risks are rather to the downside, should growth rates slow down. I know that this a dangerous assumption as growth companies can grow and grow without ever coming back – but I want to be realistic and more conservative.
It pains me to buy a company at 40x – period.
Also, the story of energy drinks in general and Monster in particular are already well known. Monster is a behemoth with a market cap of close to 60 bn. USD – again, in a niche segment. Where shall it grow to? Okay, fine, maybe 100–150 bn. USD could come one day – but this is not the multi-bagger I am searching for.
This story is rather over. With a multiple of 40x, at least a double, maybe even a tripple in business operations is already priced in! Where shall the surprise to the upside come from?
That’s why I was searching for a similar, not so well covered opportunity, to maybe repeat the success that Monster had over the last more than two decades. It was necessary to find a smaller company, operating in a likewise lucrative and growing niche.
And I found an opportunity!
New research report for Premium PLUS Members!
The company I found, is also active in a growing niche.
However, due to being way smaller, it has also a vast potential in front of it. This founder-led, net-cash equipped business is a leader in a category it even created itself!
The risk-reward ratio should be favorable. In a worst-case scenario, I expect a takeover attempt by a larger beverage corporation – that should put a floor under the stock price. The rest is all upside, depending on execution and managing the current challenges affecting the whole industry, but also some company specific ones.
A worthwhile taste – cheers!
The success story of energy drinks, respectively the stock of Monster Beverages is quite amazing, even surpassing the already incredible development of Apple’s stock.
However, I think that – despite being in a still growing niche market – the stock is too well covered and priced too richly.
That’s why I managed to find an alternative – a second chance for a multi-bagger? My Premium PLUS Members will find out.
By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.
Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.
Premium PLUS Members also get access to all Premium publications.