In a turbulent market environment, there are several strategies designed to outperform. Some of these include buying beaten-up high-beta growth stocks where sentiment is out of favor.
A complementary strategy involves balancing this with deep value stocks trading at high free-cash-flow yields that are likely to be under accumulation.
However, both strategies can translate to relatively high portfolio volatility, given that growth stocks can be very volatile in a market downdraft.
Meanwhile, although deep value stocks may be under accumulation due to high free cash flow yields, their returns can be lumpy with the potential for violent bottoming processes until their low has finally been reached.
To smooth out portfolio volatility, I believe it makes sense to position a portion of one’s portfolio defensively.
Unfortunately, with this being a popular trade over the past year, many defensive stocks have soared to premium valuations, with names like Mckesson (MCK) and UnitedHealth (UNH) up over 70% since Q3 2021.
Fortunately, one name in the defensive space has underperformed over the past 18 months, setting up a low-risk buy point ahead of significant earnings growth over the next four years.
This stock is Monster Beverage Corporation (MNST), one of the undisputed leaders in the energy drink category that just entered the alcoholic beverage market.
Accelerating Earnings Growth On Deck
Monster Beverage Corporation is a $46.0BB company in the non-alcoholic beverage category that has boasted one of the most impressive earnings growth rates in the defensive space. This is evidenced by a 22.1% compound annual EPS growth rate since FY2013 ($2.30 vs. $0.65).
However, while its roots are in non-alcoholic beverages, with it being second only to Red Bull in the non-alcoholic beverage category, the company entered the alcoholic beverage market this year with its $330MM acquisition of CANarchy.
The CANarchy deal gives Monster Beverage multiple established brands in the craft beer and hard seltzer market.
In fact, CANarchy was the sixth largest craft brewer in the United States, with seven manufacturing facilities, and the brands are sold across 20 countries. Some brands include Wasatch, Cigar City, Oskar Blues, Wild Basin Hard Seltzer, and Blind Melon.
While the price paid might appear high at nearly 3x FY2021 sales, it’s worth noting that this is expected to be a platform from which Monster can launch several new beverages.
Monster plans to release its first alcoholic malt beverage with 6% ABV and four flavors later this year. CEO Rodney Sacks noted that it would be distinguishable from the many hard seltzer brands already crowding the market.
In addition, Monster is planning to launch a sugar-free option for its original Monster Green Energy, which is its leader across all markets.
This is being done to retain customers that might be looking to shed sugar and provide the best of both worlds with the same great flavor but with no guilt.
This could also bring in new customers who might have stuck with other sugar-free brands, with no pure sugar-free option for Monster Green, its category leader.
Unfortunately, despite these positive developments, the stock has remained under pressure, with margins pinched due to inflationary pressures.
This will lead to a second consecutive year of declining annual EPS, with estimates sitting at $2.30, translating to zero growth from FY2020 levels despite a sharp increase in revenue.
Not surprisingly, this has weighed on the stock, which is 15% off its highs, a divergence from most defensive names.
The Fundamental Picture
Monster Energy reported revenue of $1.65BB in Q2, an 11% increase year-over-year, helped by strong growth in the energy drink category (+8.2% year-over-year). Within the category, Monster outperformed peers like Red Bull, RockStar, and 5-Hour Energy from a growth standpoint.
However, inflationary pressures from fuel and materials costs have weighed on margins, which led to a 32% decline in quarterly earnings per share ($0.52 vs. $0.75).
Not surprisingly, this has weighed on the stock, which is 15% off its highs, a divergence from most defensive names.
The good news is that Monster will increase prices to mitigate inflationary pressures, and fuel costs have pulled back from their highs, potentially providing easier year-over-year comps.
So, while FY2022 annual EPS is forecasted to be down 10% from FY2020 levels ($2.30 estimates vs. $2.64), contributions from its alcoholic beverage category, new releases, and reduced inflationary pressures are expected to translate to new all-time highs for annual EPS in FY2023 ($3.08).
If we look out further, annual EPS is expected to hit $4.39 in FY2025, nearly doubling from FY2022 levels, a massive acceleration after a two-year pause.
In my view, this should lead to a return to its previous earnings multiple (34-38), given the improvement in the earnings trend. MNST currently trades at ~28.2x FY2023 earnings estimates at a share price of $87.00.
The Technical Picture
From a technical standpoint, Monster may not look all that exciting, trading below its 50-day and 200-day moving averages and recently making a new 3-month low.
See the Full Technical Analysis Report for MNST
However, if we zoom out, Monster is pulling back toward its 50-month moving average for only the fifth time in the past decade, with all of these tests of this key moving average leading to major bottoms.
Currently, this moving average comes in at $77.00. Still, I would expect it to provide a floor for the stock, suggesting limited downside from current levels just ahead of exciting new developments for the business (entrance into the alcoholic beverage market).
The Bottom Line
Based on what I believe to be a fair earnings multiple of 34.0 (15-year average: 35.1) and FY2023 annual EPS estimates of $3.08, I see a fair value for Monster Beverage of $104.70.
While this may not be the 50%+ upside some investors are looking for in investments currently in the current landscape, I see MNST as a way to add growth to the portfolio with a defensive tilt, balancing out what might be higher beta names in the growth space.
However, assuming Monster’s entrance into the alcoholic beverage market is stronger than expected, I would not be surprised to see the stock trade above $120.00 per share (38% upside) in the next 18 months.
In a market that could remain volatile and trade in a holding pattern until the Fed pivots or earnings can play catch-up, I see this is a relatively safe way to generate low double-digit annualized returns in a choppy market.
The above analysis of Monster Beverage Corporation (MNST) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Monster Beverage Corporation (MNST) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Monster Beverage Corporation (MNST) is struggling to move into a solid trend. Beware of choppy markets and consider a sidelines position until a stronger trend is identified.
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