The Monster Created By Wall Street – Citron Target on Monster Beverage Corp (MNST): $80 near term by Citron Research
The past 6 months on Wall Street could be described as “interesting times”. Hedge funds have underperformed the market — some “smart guys” have delivered near-catastrophic returns. Investors of all stripes are now clamoring to rebalance their portfolios. Everyone in the money management game is now facing up to the stark reality that has been altogether forgotten over the last seven years of “straight-up” euphoria:
Monster Beverage Corp (MNST) – Valuations Matter!!!
Yes, men with ponytails and screaming bald men on soapboxes have for years browbeat retail investors to buy stocks based on the principle that “they are high, so they have to be going higher”, ignoring underlying valuations. When that party ends, it ends fast, and as you’ve noticed, they don’t ring a bell.
Mr. Market has done a fine job in rebalancing a lot of the froth in the market. But Citron has identified one stock whose valuation — yes, valuation — is completely removed from reality considering the business risks and limited growth opportunities.
We reintroduce the investing world to an old name that is worth a second look – Monster Beverage (NASDAQ:MNST).
Shorts are sometimes right and sometimes wrong, but they are always early.
The bear case thesis on Monster has been around for years. It used to focus on the headwinds of the energy drink business and the health risks of the product. All the while the price of Monster Beverage has continued to defy gravity– as if the stock drank four cans of its own product.
Citron believes now is the time for both long and shorts to consider the real facts surrounding the business, and consider the price of the stock within the perspective of current market conditions.
Amped-Up Valuation: Over the past 5 years Monster Beverage’s market valuation is up 500%, while its revenues are up 90%.
Let us start with the facts.
Monster Beverage is not a technology company, nor is it virally scalable, and by no means can you ever call it disruptive (to your health maybe). Monster is not even the #1 player in the energy drink market. The Monster product is not even discernable to its customers as it is more about the marketing than the product…yet Wall Street has ignored reality.
Look at the basic comparisons below. Wall Street is valuing Monster like a tech company, when in reality, it is a single product company selling sugar and caffeine water amongst many competitors, whose business is only as strong as its marketing muscle.
To illustrate how utterly ridiculous this is versus other beverage companies, consider these comps.
Dr. Pepper Snapple Group’s valuation (NYSE:DPS) is 30% smaller than Monster’s, despite boasting 100% more revenues and roughly 60% greater EBITDA than Monster.
Valuing Monster comparable to DPS’s multiple would result in 48% downside to Monster owners.
Citron explains Monster’s valuation disconnect with reality, demonstrating why Monster will trade down to $80.
I’m in Love with Coca (cola)
Coca Cola’s buy-in may have temporarily validated Monster, but at a second look it is not as sweet as investors had imagined. After years of controversy, Coca Cola provided some much needed short-term validation in 2014 with its investment in Monster Beverage and as usual Wall St overreacted.
Since the transaction MNST stock price is up almost 100% while revenues are up only 10% (even less if you remove the Coca Cola energy drink brand revenues transferred to Monster).
Now let’s get back to reality. Coca Cola’s investment is NOT the first step towards an eventual purchase. On the contrary, it is the opinion of Citron that this transaction eliminated the possibility of a future takeout and the premium that had always glimmered in the company’s future. Coke used this transaction to quietly EXIT the energy drink business, distancing itself from the reputational risks of energy drinks to their own portfolio. (One hypothesis is that Coke’s portfolio of energy drinks was never successful because its marketing is limited by its engagement in ‘ethical’ advertising).
This is how the transaction was structured. Coca Cola now has the benefits of participating in the energy drink business without the risk … something even Buffett and Ackman can agree on is a good thing.
In fact, if you take out the Coke products, Monster’s minimal organic growth is not supportive of a company with this multiple.
Here’s the analysis in a single chart:
Why an $80 Short Term Target???
In trying to find an honest comparable for Monster, Citron thinks Green Mountain Coffee is the ideal candidate. Both companies are high growth beverage companies who attracted sizable investments from Coca Cola.
We would argue that GMCR is the higher quality business because it is the dominant leader in its category and its product produces recurring revenue through the sale of K-Cups. Given that powerful advantage to GMCR, below we present the comparison of MNST and GMCR on a pre and post takeout basis.
If we chose to value MNST vs Dr. Pepper Snapple, a more direct competitor, it would result in a 48% downside to Monster owners. For the sake of the benefit of the doubt we used the post GMCR takeout value as a benchmark to get to $80 a share for Monster.
See full PDF below.