MCINTIRE INVESTMENT INSTITUTE
AT THE UNIVERSITY OF VIRGINIA
Zixing Chen, Chuxi Sun| 7 February 2013
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McIntire Investment Institute
AGENDA
BUSINESS OVERVIEW
THESIS POINTS
MARKET MISCONCEPTIONS
VAR
RISKS
RECOMMENDATION
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McIntire Investment Institute
COMPANY OVERVIEW
•  Founded in 1935 and Southern California-based, Hansen Natural
Soda (HANS) changed its company’s name and symbol to Monster
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Beverage Company (MNST) on January 5, 2012
•  Develops, markets, and distributes energy drinks, fruit drinks, iced
teas,
2 and still water both in the U.S. and overseas
•  #2 energy drink behind Red Bull
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•  Operates
in two segments: Direct Store Delivery (95.3%), whose
principal products comprise energy drinks, and Warehouse (4.7%),
whose principal products comprise juice based and soda beverages
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•  Promotes its products through the sponsorship of over 200 athletes
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McIntire Investment Institute
STOCK OVERVIEW (NASDAQ: MNST)
Monster Beverage Corporation (MNST)
Price: 48.33
Market Cap: 8.28B
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P/E (ttm): 26.55
52wk Range: 39.99-83.96
EPS (ttm): 1.82
Avg Vol: 1,788,000
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THESIS POINTS
q Decelerating margins growth rate
q Overhyped acquisition rumors
q Limitations of well-defined consumer
marketing
q Perceived health concerns and international
expansion uncertainties
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CONCENTRATED PRODUCT PORTFOLIO
•  Product concentration
and lack of innovation
•  Vulnerability to market
saturation
•  No real clear
differentiation between
the products or their
target markets among its
nearly 30 different flavors
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ENERGY DRINK MARKET LOSING MOMENTUM
Energy Drinks’ YoY Growth (2001-2011)
•  Energy drinks’ YoY
growth shows signs of
deceleration
•  MNST’s 11.2% YoY growth in the past 4 weeks is off the pace of 14.3% YoY sales
growth (ttm)
o  Monster Beverage Corp 19.6% → 10.5 %
o  Red Bull
15.9% →
18.1%
o  Rock Star
2.4%
→
2.5%
o  Coca-Cola Co.
7.4%
→
6.6%
o  Pepsi Co.
-12.6% → -17.8%
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MISCONCEPTION #1
ENERGY DRINKS’ PROFITABILITY GROWTH IS EXPLOSIVE
“The U.S. energy drink market has
reached a saturation point much quicker
than expected.”
- Jonas Feliciano, Beverage Analyst at Euromonitor International
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INVENTORY GROWTH SURPASSING REVENUE GROWTH
•  Inventory growth surpasses revenue growth
•  Wasted stale inventory hurts profitability
•  4th quarter's revenues continuously follow a
downward trend
o  Less winter sports and sponsored games
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3/4 MISSED ESP PROJECTIONS
Monster Beverage Corp. YoY Revenue Growth
•  Growth is slowing down
•  MNST continuously missed analysts' EPS expectations
in the last four questers
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STAGNANT MARGINS AND WEAK OPERATING CASH FLOW
27.49%
17.12%
•  Stagnant operating margin caused by high raw materials costs
and increased international expenditures
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UNJUSTIFIED PREMIUM VALUATION
Ticker
P/E
P/S
P/B
P/FCF
D/E
EPS
DPS
15.55
1.58
4.06
37.50
1.19
2.92
KO
19.45
3.52
5.05
54.16
0.99
1.92
MNST
26.15
4.08
9.71
28.93
0
1.82
PEP
19.32
1.71
5.24
51.79
1.30
3.75
•  MNST is currently trading at 26.6x earnings, 5.8x sales,
and 17.4x EBITDA
•  A 25.3% growth rate in the past 5 years suggests unrealistic
expectations for growth and outperformance
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MISCONCEPTION #2 MNST IS THE NEW SBUX
•  Highly developed brand,
logo, copyrights, and
trademarks
•  Physical stores, service,
customized products
•  Product diversification
with the recent acquisition
of Evolution Fresh Juice
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•  Markets its products
primarily directly to
retailers
•  No patents
•  Pre-packaged products
•  Dependence on suppliers
for manufacturing and
packaging products
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THESIS POINTS
q Decelerating margins growth rate
q Overhyped acquisition rumors
q Limitations of well-defined consumer
marketing
q Perceived health concern and international
expansion uncertainties
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IS MONSTER FACING A BUYOUT?
•  Rumors of a possible takeover has been spread around since
2007
•  HANS’s price peaked but soon slumped over the next 4 quarters
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IS MONSTER FACING A BUYOUT?
•  Similarly, MNST’s price peaked in Jun 2012 but fell significantly in the
following two quarters
MNST’S Share Price, 2011-2013
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RISKS OF ACQUISITION
•  MNST went up 63% in value during 2012. While MNST’s
size (especially by book value) makes it an attractive buyout
candidate, a close to $10 billion acquisition cost would
make this deal the most expensive one in the industry’s
history
•  FDA Investigation and increased calls in Congress can
inspire regulatory action and would make a buyout highly
unlikely to occur in the next 3 months
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THESIS POINTS
q Decelerating margins growth rate
q Overhyped acquisition rumors
q Limitations of well-defined consumer
marketing
q Perceived health concern and international
expansion uncertainties
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HIGH MARKET COMPETITION
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LIMITED CORE DEMOGRAPHICS
Age and market discrimination
continue to be a problem for
the energy drink market.
Current Advertising:
•  Sports, parties
•  Selling Lifestyle
•  Premium access
•  Celebrities
endorsement
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Targeted Audience:
•  Athletes
•  Male, aged 14-26
•  Extreme sport fans,
gamers, hip
Challenges:
•  Missing new markets
•  No use of mainstream
media
•  No top-of-mind
awareness
•  Stigma attached to
energy drinks
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MISCONCEPTION #3
MNST RUNS HIGHLY SUCCESSFUL MARKETING CAMPAIGNS
•  Red Bull currently spends
approximately 30% of their
worldwide sales on marketing
and advertising which equates
to $600 million
•  Red Bull created the nontraditional content marketing
strategy since early 1980s and
has long been in the game of
marketing to extreme sports
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•  Monster promotion spending
climbed to 23 %, or
approximately $105 million,
in 2012
•  Monster entered the market
after Red Bull, discounted
their product, and adopted
similar marketing strategy
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RED BULL: EXPLORING HUMAN POTENTIAL
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MONSTER: SHEDDING THE BAD BOY IMAGE
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THESIS POINTS
q Decelerating margins growth rate
q Overhyped acquisition rumors
q Limitations of well-defined consumer
marketing
q Perceived health concern and international
expansion uncertainties
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CONTINUED HEALTH AND SAFETY CONCERNS
Energy Drink-Related Emergency
Department (ED) Visits
•  In recent years, energy drinks
have caused more and more ED
visits
•  FDA routinely attempts to push
for tighter restrictions on the
marketing of energy drinks to
children and teens
•  Negative effect on consumer
perception outweighs potential
for increased government
regulation
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CONTINUED HEALTH AND SAFETY CONCERNS
•  On Oct 22nd, 2012, FDA started investigating reports of five deaths that
might be associated with Monster Energy Drinks.
•  This news caused a 13% drop in the Monster’s share price.
MNST’S Share Price, Oct 22nd, 2012
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CONTINUED HEALTH AND SAFETY CONCERNS
•  Although the FDA have terminated the investigation, it still kept an
close eye on the company’s performance and health issues that were
possibly caused by energy drinks.
•  The company need to resolve these health concerns to bring back
positive investor sentiment.
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UNCERTAINTIES IN GEOGRAPHICAL EXPANSION
•  Competitors like Coke, Pepsi,
Red Bull, and Starbucks all have
established a substantial
international presence
Global Share of Energy
Drink Market
•  Globally speaking, the Red Bull
has almost half of the market
share, especially in some Asian
countries where Monster have
not entered
•  Concentrated product portfolio
might be a significant weakness
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UNCERTAINTIES IN GEOGRAPHICAL EXPANSION
•  High shipping expenses and other cost pressures outside the
U.S. threaten profit margins and operating performance
o  Example: product damage associated with the rollout into Japan and
South Korea hurt Monster's international margins in Q2 of 2012
•  Red Bull is banned in some countries due to the ingredient
Taurine such as Denmark, France, and Norway. And Taurine is
a key ingredient for energy drinks. Therefore, it is reasonable to
say that Monster might face the same situation when it expands
to foreign markets
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THESIS POINTS
q Decelerating margins growth rate
q Overhyped acquisition rumors
q Limitations of well-defined consumer
marketing
q Perceived health concern and international
expansion uncertainties
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VAR
Survey: Energy Drink vs. Energy Drinks Alternatives
Findings:
(Participants are random sampled UVA students )
•  Preferences: Coffee drinks > Energy Drinks > Sports Drinks > Soda
•  76.5% of participants consume Red Bull most often, 17.6% consume
Monster most often, and 5.9% chose Monster XXL as their favorite energy
drink
•  58.3% of participants drink caffeinated drinks “feel awake in general,” 25%
chose “to focus with studying,” and 12.5% of participants “do not drink
energy drinks”
•  100% of participants are aware that there are health risks associated with
energy drinks, while 58.3% of them “try to find healthier alternatives to
energy drinks”
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VAR
“Energy drinks have become increasingly
popular these days… but there have been a few
complaints toward them… ”
- Customer Service at Walmart, Charlottesville
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VAR – ONLINE CUSTOMER REVIEWS
•  “I've been drinking this over a year, until I got arrithmias and anxiety, and
panic attacks. It's not worth the risk!”
•  “Contains the artificial sweetener 'sucralose', which causes me migraines
and makes me lethargic. There should be a sucralose warning on the front
label!”
•  “There are always loose cans in the box, there are always dented cans. I
refused one delivery due to the cans open and the box soaked, falling
apart.”
•  “Case arrived damaged, only offered a return of item, are they joking?”
•  “This box was so damaged it lost the box it was mailed in and was leaking
from several cans of the product. This was the worst I have ever received a
product over the 10 plus years.
*Taken from Amazon.com
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CATALYSTS
•  Inflating commodity costs and government oversight limit longterm growth
•  Lawsuits damage the company’s public image and influence market
sentiment
•  The outlook for MNST’s 10-K is bearish
•  Too many short, mid, long-term headwinds
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RISKS
•  Development of innovative strategies to differentiate its brand
•  Successful market penetration and international expansion
•  Still an appealing buyout target
•  Relatively strong financial statistics
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RECOMMENDATION
•  Immediately initiate short position at 0.75%
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QUESTIONS?
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APPENDIX 1 SWOT ANALYSIS
Strengths:
•  Market leadership – S&P 500
•  Strong and above-industry-average
growth
•  No long term debt
•  Strong, fresh, and fashionable brand
identity
Weaknesses:
•  Less financial resources than
competition
•  Lack of innovation
•  Reliant on small product base
•  Inexperience in the international
market
•  Lack of patent on its recipe means
low market barrier
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Opportunities:
•  New product Peace Tea adds more
revenue stream
•  Celebrities marketing and advertising
•  Possibility of being bought out by KO or
PEP
•  Consumer recognition though
sponsorship like sport events
Threats:
•  Government regulations
•  Consumer awareness of health
•  Frictions preventing its buyout
•  Consumers not accepting its product in
emerging/new markets
•  Dependence on energy drink segment
•  Enormous industry product competition
•  Changes in consumer preferences
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