Thursday, April 22, 2010

Energy Drinks

Even with traffic down at convenience stores, the energy drink segment continues to grow. According to a report using data from Nielsen Co., energy drink sales have improved recently with Hansen's Monster (the # 2 energy drink in the US behind Red Bull) growing faster than the overall energy drink market.

article

...growth of the overall energy drink category and Hansen Natural Corp., maker of Monster, both accelerated in the four weeks leading up to March 20. Overall energy drink sales in convenience stores rose 5.1 percent and Hansen's sales rose 8.6 percent. Convenience stores account for about 75 percent of energy drink sales.

Hansen Natural Corp. should earn ~$ 220 million this year on over a $ 1.2 of sales. Its current market value is ~$ 3.7 billion with no debt and over $ 400 million of cash on the balance sheet. They have created a very successful brand but distribution still depends on the likes of Coca-Cola. With a ~15x enterprise value/earnings it is definitely not an inexpensive stock. As of now, the company's economics are excellent with extremely high returns on capital. If those returns on capital are at all durable over time then the current multiple is cheap. The difficult part is: 1) a lack of product breadth (90% of sales comes from energy drinks), 2) dependence on others for distribution, and 3) fierce competition between Hansen and larger (financially stronger) companies. These 3 things will continue to be hard to gauge risks going forward. As a result, estimating intrinsic value is not easy for this one.

On the other hand, if someone wants to make a concentrated investment in one of the two leaders of the energy drink segment Hansen is pretty much it. I've noted what I'd pay for HANS in Stocks to Watch for quite a while (up to $ 30/share). I think a large margin of safety is warranted on HANS to account for the 3 risks noted above (Current market price is ~ $ 41/share).

It is possible that Hansen will be acquired one of these days by Coca-Cola or Pepsi to more firmly tie this strong brand with distribution. That's a reasonable guess but who knows. Coca-Cola seems more likely considering the existing distribution relationship. The CEO of Coca-Cola Enterprises (CCE) has said recently he'd like to have more Monster to distribute.

Hansen has obviously done a lot of things right up to now. They have been going up against some pretty tough competitors for a long time and winning. Building a highly profitable $1 billion brand in a decade or so with competitors like Coca-Cola, Pepsi and Red Bull is no small feat. It will interesting to see if they can continue to execute as they move from being primarily a US brand to a global one.

Adam

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