UNIVERSITY OF OREGON
INVESTMENT GROUP
12/03/08
Consumer Goods
HANSEN NATURAL CORPORATION
HOLD
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
DCF Analysis
Comparables Analysis
Current Price
Weighted Implied Price
20.52-50.18
HANS/Nasdaq
1.52
92.4 (million)
2,445,354
2,342,340,000
29.75
$0.00
0.00%
$46.68
$9.70
$27.82
$39.29
Summary Financials
Revenue
Income
Three Quarters
through 2008A
$779,408,000
$131,480,000
BUSINESS OVERVIEW
Hansen Natural Corporation is a key player in the business of developing, marketing, selling and distributing alternative
beverages. The company derives revenue from two reportable business segments, Direct Store Delivery (DSD) and the
Warehouse segment. The DSD segment primarily consists of energy drinks. The warehouse segment primarily consists of
juice-based beverages and carbonated soda beverages. Their principal product is Monster Energy, which recently overtook
Red Bull as the number one selling energy drink in the world. Hansen Natural was incorporated in Delaware on April 25th,
1990. The corporation’s principal place of business is located in Corona, California. As of the 2007 annual report, Hansen
Natural employs 904 people. Recently, Hansen Natural announced that they would execute a $200 million stock buyback in
2008-2009. Hansen Natural is traded on the Nasdaq Stock Exchange under the ticker symbol HANS.
Covering Analyst: Thomas S. Donohue
Email: tdonohue@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member
students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG
may have clerked, interned or held various employment positions with firms held in UOIG’s porfolio. In addition, members of UOIG
may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Hansen Natural Corporation
Univer sit y of Or egon I nvest ment Gr oup
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HISTORY
Hubert Hansen and his three sons conceived the Hansen Company in the 1930’s. The company’s initial focus was to sell
fresh non-pasteurized juices in Los Angeles, California. In 1977, Tim Hansen, one of Hubert’s grandsons, perceived a
strong future demand for pasteurized natural juices and juice blends. The company was restructured, beginning in the
1990’s and lasting through 2001, where the company sought to purchase ownership rights to all of Hansen trademarks
previously owned by other entities. On September 8, 2000, HBC acquired the natural soda business Blue Sky Natural Co.
Not long after the Blue Sky acquisition, HBC purchased Junior Juice in 2001. In the last decade, Hansen has developed a
diverse product portfolio. Rodney Sacks has been the Chairman and CEO of Hansen Natural since 1990.
PRODUCTS
Hansen offers the public a diverse product portfolio. Most of their products fall into four categories; Energy, Juice, Tea,
and Soda
Energy
Most of Hansen’s revenue is generated from their Monster Energy Brand. Monster Energy was launched in 2002. The
drink was initially offered in 16-ounce cans, which was nearly double the size offering of competitive energy drinks on the
market. In 2003, a “Lo-Carb” version of Monster Energy was released. In 2005, Hansen released Monster Energy Khaos.
Monster Energy Khaos contained 50% juice. The development of Monster Energy Khaos was a testament to Hansen’s
awareness of consumer preferences. In 2007, Hansen introduced Monster M-80tm and Monster MIXXED. Hansen has
successfully kept up the Monster Energy Brand by introducing variations on both flavor and packaging size. In addition
to the Monster Energy Brand, Hansen offers Lost Energy Drinks, Rumba Energy Juice, Joker Mad Energy, Ace Energy
Drinks, Unbound Energy Drinks, and Hansen Energy Drinks. All energy drink sales contribute to the DSD segment.
The DSD segment accounted for approximately 90% of sales through the completion of three quarters in 2008.
Juice
Hansen’s juice line is typically offered regionally and targeted at young children. Hansen’s juice product line consists of
Hansen Natural Apple Juice, White Grape, Peach, Purple Grape, Orange, Pomegranate, Apple Strawberry, and Apple
Grape. They also offer juice cocktails (cranberry, raspberry, apple, white grape, apple berry, and apple.) Hansen also
offers Juices for Children and Junior Juice. Juice beverage sales contribute to the Warehouse Segment. Historically,
revenue contribution from the Juice segment has been minimal. In the future, Hansen does not have any immediate plans
to develop a juice that will significantly increase their juice beverage sales.
Tea
In 2006, Hansen introduced a new line of green tea sodas and iced teas. Tea beverage sales also contribute to the
Warehouse Segment. Historically, revenue contribution from the Tea segment has been minimal. In the future, Hansen
does not have any immediate plans to develop a tea that will significantly increase their tea beverage sales.
Soda
Hansen Natural Sodas are primarily offered regionally. Hansen offers natural sodas in eleven flavors (mandarin lime, key
lime, grapefruit, raspberry, ginger ale, creamy root beer, vanilla cola, cherry vanilla crème, orange mango, kiwi strawberry,
and pomegranate.) In addition to Hansen Natural Sodas, Hansen offers Blue Sky Natural Sodas. Soda sales also
contribute to the Warehouse Segment. The natural soda business offers opportunity, but Hansen has no current plans of
expanding their soda line. Soft drinks are such a popular beverage around the world that there are obvious opportunities
and benefits that could come about from the expansion of Hansen’s soda line, but there is such a high degree of
competition present in this segment. For example, Coke and Pepsi.
In addition to these products, Hansen offers bottled water and Fizzit powdered drink mixes. Sales from these products
are extremely limited. Hansen’s current product philosophy is expressed in the 2007 annual report,
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“During 2007 we continued to expand our existing product lines and further develop our markets. In particular, we continued
to focus on developing and marketing beverages that fall within the category generally described as the alternative beverage category,
with particular emphasis on energy type drinks.”
I would expect Hansen to continue to pursue this current product philosophy because so much of their revenue is
generated from their Monster Energy Brand, and I was unable to find any information that would lead me to believe that
they were attempting to compete stronger in the juice, tea, or soda segments.
CUSTOMERS
Hansen Natural’s customers are typically retail grocery and specialty chains, wholesalers, club stores, drug chains, mass
merchandisers, convenience chains, full service beverage distributors, health food distributors, and food service
customers. These customers then sell Hansen Natural’s products to their final consumer. Full service distributors
accounted for 75% of sales through three quarters of 2008. Historically, full service distributors have accounted for over
half of all sales. Health food distributors have been the smallest customers, only accounting for 2% of sales over the last
two years. Given these percentages, it is imperative for Hansen Natural to sustain a healthy relationship with their full
service distributors. If their relations with full service distributors were to weaken, Hansen Natural’s sales would likely
drop significantly.
MARKETING
Although Hansen Natural’s initial customers are retail grocery and specialty chains, wholesalers, club stores, drug chains,
mass merchandisers, convenience chains, full service beverage distributors, health food distributors, and food service
customers the secondary customers are independent consumers. In order to keep their initial customers, they need to
sustain independent consumer demand. In other words, independent consumers need to continue to want Hansen
Natural products. The energy drink market typically targets people ages 13-29. This is typically the portion of the
population that believes energy drinks will give them an extra boost. In recent years, older people have been consuming
more energy drinks. Hansen’s Java Monster is a coffee flavored energy drink that perhaps was partly developed to target
the older population. Despite pushes like this, most sales still come from the 13-29 age group. More specifically, energy
drinks are targeted to the extreme sports crowd, college students, and the hip-hop crowd. Since there are so many energy
drink choices, it is important for Hansen to make sure their products stand out. In order to do this, Hansen has
attempted to develop strong brand name recognition and loyalty. If you go to an action sports show in the United States,
there is a high probability that you will see the Monster logo. If Hansen wants to continue to generate high revenues from
their Monster Energy Brand they need to continue to advertise where their potential consumers are. One common
marketing technique used to push energy drinks is giving out free samples. This is a great technique, if in fact the recipient
will purchase the product in the future. However, if recipients do not purchase the product in the future the strategy is
failed and will entail a greater cost to the company.
CONTROVERSY
Energy drinks are still surrounded by controversy due to their large levels of caffeine and other common energy drink
ingredients. These ingredients include taurine and glucoronolactone. Energy drinks are Hansen’s principal product, so
any future negative controversy involving energy drinks could negatively affect their business. Recent controversy entails
the mixture of energy drinks with alcohol. As reported earlier in 2008, there still have not been any significant attempts to
ban the sale of energy drinks in the United States. If a ban such as this were to ever come about, Hansen Natural would
likely become crippled because so much of their revenue is derived from their Monster Energy Brand.
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COCA-COLA DISTRIBUTION
On October 6, 2008, Hansen Natural, The Coca-Cola Company, and Coca-Cola enterprises announced that they had
completed agreements for the distribution of the Monster Energy Brand in six Western European countries (Great Britain,
France, Belgium, The Netherlands, Luxembourg, and Monaco), Canada, and selected territories in the United States. These
agreements will not affect Hansen’s outstanding agreement with Anheuser-Busch. The agreement with Coca-Cola will take
effect this November in the United States and Western European countries, however the agreement will not take effect in
Canada until early 2009. Rodney Sacks, Chairman and Chief Executive Officer of Hansen Natural, commented on the
agreements,
“We believe the relationship with The Coca-Cola Company and Coca-Cola Enterprises will enable us to build on the success of
the Monster Energy Brand in North America and expand into fertile new international markets. In the United States, the
relationship will complement our existing long-term agreements with Anheuser Busch distributors, which have been and we expect
will continue to be very important to Hansen. We believe that the combination of these two leading distribution systems will
provide us with an unrivaled distribution network in North America.”
Under the agreements, Coca-Cola bottlers, primarily Coca-Cola Enterprises, will service a large portion of Monster Energy’s
current North American Direct Store Delivery (DSD) volume. When I spoke with investor relations at Hansen Natural, they
were obviously ecstatic about the agreement with Coca-Cola and Coca-Cola Enterprises. This agreement will make Monster
Energy available to a larger customer base, which will increase the opportunity for sales. This distribution agreement is one of
the factors that led me to project high revenue growth in the near future.
PORTFOLIO HISTORY
Currently, Hansen Natural stock is held in both the Svigal’s Portfolio and the Tall Fir’s Portfolio.
Svigal’s Portfolio
In the Svigal’s portfolio, the stock was purchased on the recommendation of Dylan Potter, the DADCO Portfolio Manager,
on March 14, 2008. The Svigal’s Portfolio owns 90 shares amounting to a cost basis of $3,371.30. The stock was originally
purchased at $37.46 per share. As of November 30, 2008, the stock was trading for $29.75, which amounts to 35.74% loss on
the investment. Hansen represents about 3.6% of the Svigal’s Portfolio value, and it is in the consumer goods sector. These
numbers are subject to slight variation, as Hansen stock prices have been fluctuating.
Tall Fir’s Portfolio
In the Tall Fir’s Portfolio, the stock was purchased on the recommendation of Dylan Potter, the DADCO Portfolio Manager,
on April 1, 2008. The Tall Fir’s Portfolio owns 480 shares, which were purchased at $39.48 per share. This amounts to a cost
basis of $18,950.40. As of November 30, 2008, the stock was trading for $29.75 per share, which amounts to a 24.65% loss
on the investment. Hansen represents about 4.5% of the Tall Fir’s Portfolio value and it is in the consumer goods sector.
These numbers are subject to slight variation, as Hansen stock prices have been fluctuating.
RECENT NEWS
11/06/2008- Hansen Natural Reports Record Third Quarter and Nine Months Financial Results
Gross Sales for the third quarter of 2008 were $325.2 million, which is an increase of 17% from $277.8 million a year earlier.
Net Income was $52.4 million, which was an increase of $14.5 million from last year. Rodney Sacks, Chairman and CEO,
attributed this record third quarter to strong sales of their Monster Energy Brand.
``We are pleased with the continued strong performance of the Monster(r) brand given the challenges being experienced in the
broader economy, which are resulting in weaker sales being recorded in almost all categories of ready-to-drink beverages in the
United States. This weakness is most pronounced in convenience store cold drink channels, where the vast majority of energy
drinks are sold. We continue to believe that the moderating growth in the energy drink segment appears, in part, to be due to the
challenging current macro economic environment and the resulting decline in store traffic,''
–Rodney Sacks
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This record third quarter is a testament to the brand strength of Monster Energy. On November 5, 2008, a day before this
release, Hansen stock closed at $24.19 a share. Five days after this release, Hansen stock was valued at $25.74 a share.
However, only two days later, Hansen stock fell by 66 cents. Given the volatility of Hansen stock prices this month, this
release had little sustainable affect on their stock price. Despite the stock price volatility, this record quarter is an achievement
given the current macro-economic environment.
10/06/2008-Hansen Announces Distribution Agreement with Coca-Cola
Hansen Natural, The Coca-Cola Company, and Coca-Cola Enterprises announced that they had completed agreements, which
will facilitate the distribution of Hansen’s Monster Energy Brand in six Western European countries, selected territories in the
United States, and Canada.
-As previously stated in this report, this distribution agreement will entitle Hansen Natural to a highly competitive
distribution network in The United States, Western Europe, and Canada. This agreement should present Hansen’s
Monster Energy Brand to a larger base of costumers, which could increase sales.
09/17/2008-Scott+Scott LLP Files Class Action Lawsuit Against Hansen Natural on Behalf of Investors
“On September 17, 2008, Scott+Scott LLP filed a class action against Hansen Natural Corporation ("Hansen Natural" or the
"Company") (NYSE:HANS) and certain officers and directors in the U.S. District Court for the Central District of California.
The action is on behalf of those purchasing Hansen Natural common stock during the period beginning May 23, 2007 and
through November 23, 2007, inclusive (the "Class Period"), for violations of the Securities Exchange Act of 1934. The
complaint alleges that defendants made false and misleading statements and material omissions regarding the Company's
business operations and that, as a result, the price of the Company's shares was inflated during the Class Period, thereby
harming investors.” –Trading Markets
-There hasn’t been any recent news regarding this lawsuit. However, if Hansen were found guilty of violating the
Securities Exchange Act of 1934 it would adversely affect their business. Private Investors are unlikely to invest in
companies that have a history of inflating share prices.
--The most significant event to happen to Hansen Natural since the purchase in the Svigals and Tall Firs portfolios has been
the distribution agreement with The Coca-Cola Company-INDUSTRY
Hansen Natural competes in the non-alcoholic beverage industry. This industry is both highly competitive and diverse. The
competition is quantified through the numerous companies that compete in this industry, including powerhouses like CocaCola and Pepsi. The diversity is quantified with the division of various non-alcoholic beverage sub segments. Some of these
sub segments are bottled water beverages, soda beverages, sports drink beverages, energy drink beverages, juice beverages, tea
beverages, and coffee drink beverages. Hansen Natural competes in five of the above-mentioned non-alcoholic sub segments.
These sub segments are energy drink beverages, juice based beverages, tea beverages, soda beverages, and bottled water
beverages.
Companies that compete in the non-alcoholic beverage industry are subject to similar input costs. For instance, most
companies utilize raw materials such as aluminum cans, glass bottles, PET plastic bottles, as well as juices, sucrose, cane sugar,
sucralose, milk, and cream. These materials are subject to price fluctuations. As a trend, the prices of glass bottles have been
increasing since 2006. In addition, the prices of PET plastic bottles and aluminum cans have also been increasing since 2006.
Materials that are utilized by the non-alcoholic beverage industry are often available from various sources, which means
companies have the ability to “shop” around for the best prices given that they are not on a contract agreement.
There are many key areas of competition in the non-alcoholic beverage industry. Some of these areas are marketing, product
pricing, development of new products, and packaging. Hansen Natural’s products compete with companies who often have
greater financial resources than they do.
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Energy Drink Competition
The energy drink beverage market is extremely competitive, largely impart to the tremendous growth of this industry in recent
years. In 2007, there were 191 recognized brands. In 2008, there are 228 recognized brands. Hansen’s energy drinks compete
primarily with Red Bull, Rockstar, Full Throttle, SoBe No Fear, and Amp. For years, Red Bull was the industry leader.
However, recently, Hansen Natural’s Monster Energy Brand overtook Red Bull to become the industry leader. Competition is
likely to remain stiff in this segment of the non-alcoholic beverage market with companies like 5 Hour Energy who are
offering an energy “shot.” 5 Hour Energy is launching large product awareness campaigns via television advertisements.
Natural Soda Competition
Hansen Natural Soda’s compete with staple companies such as The Coca-Cola Company, Pepsi Company, and Cadbury
Schweppes PLC. In addition to these large companies, they compete with local companies such as Jones Soda. It is difficult
for Hansen Natural Soda’s to compete in this specific sector. Hansen does not hold a significant market share in this sector.
Given Hansen’s current course, it is unlikely to believe that they will increase their market share significantly in the near future.
Juice Beverage Competition
The juice beverage industry is also highly competitive. Hansen Natural’s products compete directly with Minute Maid, Ocean
Spray, Welch’s, Northland, V8, and Mott’s. Hansen does not hold a significant market share in this sector. Given Hansen’s
current course, it is unlikely to believe that they will increase their market share significantly in the near future.
There are numerous risk factors that Hansen Natural and other companies that operate in the non-alcoholic beverage industry
face. Some of these factors are increased competition, changes in consumer preferences, customer relationships, increases in
cost of input materials, estimation of product demand, cost of packaging supplies, changes in government regulation, maintain
inventory levels, weather, changes in accounting practices, cash flow, and economic conditions.
When evaluating a company like Hansen Natural, it is important to recognize that they are the Monster Energy Brand.
Therefore, the energy drink industry is the most critical aspect to their future outlook. Energy drinks have experienced
phenomenal growth since they were introduced. In 2004 the segment experienced 70% growth. In 2005, the segment grew
by 54%. Growth in this segment dipped below 40% in 2006 and 2007. Growth rates are expected to continue to slow down
into the 20-percentile range in 2008 and 2009. As stated earlier in this report, the energy drink industry is very competitive. It
is reasonable to suspect that Monster Energy will face stiff competition from Red Bull, who is releasing an energy shot in
2009, 5 Hour Energy, Rockstar, SoBe No Fear, Full Throttle, and Amp. Given this likely prospect of increased competition, I
predicted Hansen to slowly lose their market share.
S.W.O.T. A NALYSIS
Strengths
• Distribution agreements with The Coca-Cola Company, Coca-Cola Enterprises, and Anheuser-Busch
• No Long Term Debt
• #1 selling energy drink via the Monster Energy Brand
• Sound leadership through Chairman and CEO Rodney Sacks
• Prospect of International Growth in Canada and Western Europe via the Coca-Cola distribution agreement
Weaknesses
• Dependence on the energy drink segment
• Disability to strongly compete in the soda and juice segments
• Dependence on suppliers for manufacturing and packaging beverages
• Less Financial resources than competition
Opportunities
• Sustain Monster Energy as the #1 energy drink
• Expansion into other international markets besides Canada and Western Europe
• Successful marketing campaigns
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Threats
•
•
•
•
•
Strong industry product competition
Low barriers to entry in the non-alcoholic beverage industry
Significant changes in government regulation
Changes in consumer preferences
Changes in supply or availability of raw materials
PORTER’S 5 FORCES A NALYSIS
Supplier Power—Moderate and Stable
• In general, suppliers have the ability to purchase input prices from various suppliers. However, they are at the mercy
of price increases that pertain to a particular industry.
• In the past, Hansen has made arrangements with third party bottlers and co-packers on a monthly basis, which has
allowed all parties involved to pursue more beneficial agreements.
• Coca-Cola bottlers will service a significant portion of Hansen’s North American DSD volume.
Barriers to Entry—Low
• It is relatively easy for a company to enter the non-alcoholic beverage industry. A new company will typically start out
regionally, and will then grow proportional to its success. Market share in the non-alcoholic beverage industry is
fragmented due to the high number of competitors.
Buyer Power—High
• The high number of competitors and product offering present in this industry leads to a high number of substitute
products. This presence of substitutes leads to high consumer power.
Threat of Substitutes—High
• In this industry, it is likely that there will be a substitute for every product. Many products are similar, so a product
can become a substitute on the basis of consumer preferences, packaging, or price. The threat of substitutes increases
in a macro-economic environment like the one we are experiencing today.
Degree of Rivalry—High
• As previously reported, price competition occurs throughout the non-alcoholic beverage industry. The energy drink
segment has less price competition than segments such as the carbonated beverages, however as our economy
weakens I think that price competition will increase within the energy drink segment.
CATALYSTS
Upside
• Increased demand for products that Hansen Natural sells
• Increased consumer Confidence
• Decreased key input costs (aluminum cans, glass bottles, PET plastic bottles, dairy milk)
Downside
• Governmental regulations set forth by the Food and Drug Administration that could adversely change public opinion on
energy drinks or soda beverages
• Loss of a major customer
• Lawsuits that damage the company’s public image
• Negative controversy surrounding the energy drink industry
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COMPARABLES ANALYSIS
I used two comparable companies based on product offering, similar debt structure, as well as vulnerability to similar risk and
economic factors. The two companies that I chose were: COTT Corporation and National Beverage Corporation. These are
also two out of three companies that were previously used for comparable analysis. I weighted National Beverage Corporation
at 75% and COTT Corporation at 25%. I used four metrics to measure an implied price. The metrics I chose were
EV/Revenue (25% weighting), EV/Gross Profit (25% weighting), EV/OCF (25% weighting), and EV/EBITDA (25%
weighting). I chose to weight all of the multiples equally at 25% because they are all critical aspects to companies competing
against powerhouse like The Coca-Cola Company and Pepsi Company. I also thought this helped present a balanced
comparable analysis, given that I only weighted two companies. Through my comparable analysis I reached an overvaluation
of 65.13%
Originally, I was going to include Jones Soda (JSDA) in my comparable analysis, but after compiling the necessary information
on the company (EBIT, OCF, EBIDTA, etc) I decided that they were no longer a good comparable company. I still included
them on my comparable analysis spreadsheet; however, I did not weight this company. I did consider trying to add a third
company into my comparable analysis. Some obvious considerations are companies like The Coca-Cola Company and Pepsi
Company, however there are striking differences in geographic operation, product focus/offering, and capital structure.
Given these differences, I decided that they were not good comparable companies. I also considered prime energy drink
competition such as Red Bull and Rockstar, but as Dylan previously reported, these companies are not publicly traded. This
means that compiling information is extremely difficult. I know two companies seems less than ideal for comparable analysis,
but Hansen is in a unique position that makes finding comparable companies difficult.
I believe that my comparable analysis overstates the overvaluation, primarily because these comparable companies are recently
struggling financially as reflected through the comparable companies’ stock prices. I had to throw out some of my multiples
because they were outliers and were skewing the analysis by an unreasonable amount. I highlighted the outliers on my
comparable analysis. The principal outlier was Cott Corporation’s EV/EBITDA.
Cott Corporation- COT
“Cott Corporation, incorporated in 1955, is a non-alcoholic beverage company and a provider of retailer brand soft drink. In
addition to carbonated soft drinks, the Company’s product lines include clear, still and sparkling flavored waters, juice-based
products, bottled water, energy drinks and ready-to-drink teas. The Company operates its business in North America through
its indirect wholly owned subsidiary, Cott Beverages Inc., in the United States and through Cott Corporation in Canada. The
Company operates its International business through several subsidiaries, including its indirect wholly owned subsidiary, Cott
Beverages Ltd., in the United Kingdom and Europe, and through an indirect 90% owned subsidiary, Cott Embotelladores de
Mexico, S.A. de C.V., in Mexico.” Reuters
“A significant portion of the Company’s revenue is concentrated in a small number of customers. Its customers include many
large national and regional grocery, mass-merchandise, drugstore, wholesale and convenience store chains in its core markets
of North America and International. During fiscal 2007, Cott Corporation's sales to Wal-Mart Stores, Inc. and its affiliates
(collectively, Wal-Mart) accounted for approximately 39% of total revenue. Wal-Mart was the only customer that accounted
for more that 10% of the Company’s total revenue in fiscal 2007. The Company’s top 10 customers accounted for
approximately 64% of total revenue in fiscal 2007.” Reuters
National Beverage Corporation-FIZZ
“National Beverage Corp. (National Beverage), incorporated in 1985, develops, manufactures, markets and distributes a
portfolio of beverage products throughout the United States. The Company develops and sells flavored beverage products,
including a selection of flavored soft drinks, juices, sparkling waters, energy drinks and nutritionally enhanced waters. Its
brands include Shasta and Faygo, each of which has over 50 flavor varieties. The Company also maintains a line of flavored
beverage products for the health-conscious consumer, including Everfresh, Home Juice and Mr. Pure 100% juice and juicebased products; LaCroix, Mt. Shasta, Crystal Bay and ClearFruit flavored, sparkling and spring water products, and ASante
nutritionally enhanced waters. In addition, the Company produces Rip It energy drinks, Ohana fruit-flavored drinks and St.
Nick’s holiday soft drinks. Substantially all of its brands are produced in 13 manufacturing facilities that are located in
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metropolitan markets throughout the continental United States. To a lesser extent, the Company develops and produces soft
drinks for certain retailers and beverage companies.” Reuters
“National Beverage utilizes a hybrid distribution system to deliver its products through three primary distribution channels:
take home, convenience and food service. The take-home distribution channel consists of national and regional grocery stores,
warehouse clubs, mass merchandisers, wholesalers and dollar stores. The Company distributes its products to this channel
through the warehouse distribution system and the direct store delivery system. Under the warehouse distribution system,
products are shipped from the Company’s manufacturing facilities to the retailer’s centralized distribution centers and then
distributed by the retailer to each of its outlet locations with other goods. Products sold through the direct store delivery
system are distributed directly to the customer’s retail outlets by National Beverage’s direct store delivery fleet and by
independent distributors.” Reuters
DISCOUNTED CASH FLOW A NALYSIS
DCF Synopsis
The Discounted Cash Flows Statement used projections based on future revenue growth and a percentage of sales. Each line
item has been projected out seven years (2009-2015). I did not project out further than 2015 because it is nearly impossible to
predict demand for energy drinks that far into the future because they are possibly a “fad product.” It is also unlikely that we
would still be stakeholders in Hansen Natural that far into the future. My goal for the DCF was to show strong growth in the
energy drink segment in the near future, years 2009-2011, in order to reflect their distribution agreement with the Coca-Cola
Company. The DCF implied a price of $46.68 per share, which is an undervaluation of 67.80%.
Beta
I regressed the beta as a five-year monthly against the S&P 500. Through this, I reached a beta of 1.52 with a standard error
of .68. This beta appears reasonable given the range of historic HANS stock prices. For instance, over the last six years stock
price has had a high of $67.86 per share and a low of $.46 per share.
Revenue
In order to project revenue, I recognized the segments that Hansen has traditionally broken revenue into and projected future
growth on each of the segments. In order to project revenue growth for the energy drink segment, I had to consider various
factors. Some of these factors were Hansen’s energy drink projected market share (would it increase, remain flat, or decrease),
Hansen’s competition within the energy drink market (would competition increase, not change, or decrease), and energy drink
market growth as a whole (how fast would it grow or decline). Currently, Hansen is enjoying a 29.2% market share. I do not
believe that this market share will be sustainable for Hansen, even in spite of the distribution agreement with The Coca-Cola
Company, as it would yield possibly unrealistic revenue. I predicted Hansen’s market share to decrease slowly mainly due to
increased competition and changes in consumer preferences. The energy drink market is expected to reach 9.3 billion dollars
in sales by 2011. I used this as a base year for my projections. If Hansen sustained a 29.2% market share in 2011 it would
equate to roughly 2.7 billion dollars of sales. In order for Hansen to reach this number, they would have to see large increases
in year to year growth, which I didn’t see reasonable because in 2008 revenue growth was 18.85% from 2007 when revenue
growth was 56.75%. I think it is important to recognize that significant decrease between 2007 and 2008. I predicted the
distribution agreement with The Coca-Cola Company to increase sales by roughly 10% in 2009. From then, as to the
uncertainty in the length of the distribution agreement, changes in consumer preferences, and increased competition, I
predicted growth to begin a slight decrease from 2010 to 2011. From 2011, I predicted larger decreases in the energy drink
segment growth.
I projected revenue for the Non-Carbonated and Carbonated Beverage segments by taking the growth in 2008 and then slowly
decreasing the growth rate. I think this is reasonable because so much of Hansen’s focus is on the energy drink segment, and I
have not discovered any information that would lead me to project increases in revenue growth within these segments.
To get total revenues in my projected years, I summed up the projected numbers of all three segments.
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Hansen Natural Corporation
Univer sit y of Or egon I nvest ment Gr oup
http://uoig.uoregon.edu
Cost of Sales
Due to present macroeconomic conditions, prices of many goods have begun to regress. Due to this, I projected Cost of
Sales to decrease by nearly two percent in 2009. It is difficult to project how long the recession of prices may last, so I
projected cost of sales to increase slowly after 2009. I think this is a more accurate presentation opposed to keeping cost of
sales constant because nowhere in the past statements did I see identical cost of goods sold from year to year. As a trend, cost
of sales was decreasing as a percentage of revenue from 2003 to 2007. However in 2008, cost of sales increased as a
percentage of revenue. I think it is reasonable to predict slight increases in cost of sales as a percentage of revenue, after the
recessionary period, as the scope of Hansen’s operations increase. Another factor that lead me to project increases in cost of
sales are recent trends in rising costs of raw materials that Hansen utilizes, such as aluminum and PET plastic bottles. In the
past, Hansen has attempted to pass increased costs onto the consumer, however they will probably not always be able to pass
the extra cost on. In addition, I haven’t discovered any information that would lead me to believe that Hansen would pursue
outsourcing or other means to lower costs. It is important to note that these increases are very minimal and my intervals were
one percent increases in both 2010 and 2011. After 2011, however, I projected cost of sales to rise by .25% as a percentage of
revenue.
Capital Expenditures
As reported last March, capital expenditures have been a small percentage of revenue. It is reasonable to assume that this
trend will continue because Hansen does not have immediate future plans of purchasing equipment or space that would
significantly increase capital expenditures. With this in mind, I projected capital expenditures to remain constant at .75% of
revenue, which is in the historic range of .42%-3.88%.
Net Working Capital
I projected current liabilities to remain constant at 11% of revenue from 2009 into perpetuity. I think this is a reasonable
assumption because current liabilities have fallen into the range of approximately 8-10% of revenue. A small increase is in part
due to an increase of Hansen’s scope of operations. I was also unable to find any information that would lead me to project
current liabilities to increase as a percentage of revenue in the future. This assumption is also in line with the previous Hansen
report. Current assets were more volatile than current liabilities, which made projections more difficult. In the 2007 annual
report, Hansen expressed that they wanted to control their inventory levels more efficiently. This is one of the reasons that
led me to project current assets decreasing as a percentage of revenue. This is also in line with the previous report, and I think
it is reasonable to continue on this assumption because I was unable to find information that would lead me to project
otherwise.
Tax Rate
As my DCF shows, Hansen has suffered a variable tax rate. The tax rate has usually been above the standard 35% rate. I
asked investor relations why Hansen’s tax rate had been higher, but they were unable to provide me with an answer. In
addition, they were unable to tell me what they expected the tax rate to be in the future. Given this I picked a tax rate of 37%
in 2009 into perpetuity. This is well within the range of what they have been paying in taxes.
RECOMMENDATION
Hansen Natural is a fundamentally strong company that is experiencing healthy growth. The company recently posted record
third quarter results, despite the less than prosperous macro-economic environment. The recent distribution agreement with
The Coca-Cola Company is also a testament to the quality of Hansen Natural and their products. In addition, Hansen’s
principal product, Monster Energy, recently became the number one selling energy drink in the world. Despite these
strengths, my comparable analysis shows that Hansen Natural stock is overvalued by 65.13%. However, my DCF shows an
undervaluation of 67.80%. I believe that my DCF presents a reasonable future outlook for Hansen Natural, and that there is
still a future positive upside to Hansen Natural stock. I believe that my Comparable Analysis is not an accurate representation
of Hansen’s value because it only presents a snap shot of comparisons in our volatile market. I weighted my DCF analysis
80% and my Comparable Analysis 20%. My weighted implied price is $39.29, which is an undervaluation of 41.21%.
Given these valuations, I am recommending that the University of Oregon Investment Group hold all Hansen Natural
(HANS) stock in the Tall Firs Portfolio and any taxable account.
10
UNIVERSITY OF OREGON
INVESTMENT GROUP
12/03/08
Consumer Goods
APPENDIX 1 – COMPARABLES ANALYSIS
(Numbers in thousands of Dollars)
Weight
Current Share Price
Shares Outstanding
Market Cap
Long Term Debt
EV
Revenues (trailing 24 months)
Gross Profit (trailing 24 months)
EBIT (trailing 24 months)
OCF (trailing 24months)
EBITDA (trailing 24 months)
Multiples
EV/Revenue
EV/Gross Profit
EV/OCF
EV/EBITDA
Hansen Natural. HANS
NA
27.82
92,400
2,342,340
0
2,268,000
1,606,679
829,376
425,109
318,154
432,395
1.41
2.73
7.13
5.25
National Beverage Corp. FIZZ Cott Corporation COT
75.00%
25.00%
8.54
0.79
46,000
71,871
368,000
64,684
0
269,000
329,000
467,760
1,084,065
3,617,400
340,974
438,600
70,916
-104,300
94,429
59,500
119,839
48
0.30
0.96
3.48
2.75
Jones Soda Co. JSDA
0.00%
0.37
26,350
21,930
474
3,190
84,028
26,774
-12,204
-10,191
-9,811
0.13
1.07
7.86
9745
0.04
0.12
-0.31
-0.33
Weighted Average
100.00%
6.60
52,467.75
292,171.00
67,250.00
363,690.00
1,717,398.75
365,380.50
27,112.00
85,696.75
89,891.25
Implied Price Weights
0.26
4.52
25.00%
0.99
8.89
25.00%
4.58
15.76
25.00%
2.06
9.64
25.00%
Implied Price
9.70
Current Price
27.82
Under (Over) Valued -65.13%
I identified highlighted numbers as outliers and chose not to include them in my evaluation. Jones Soda Co (JSDA) was not weighted in my evaluation
Covering Analyst: Thomas S. Donohue
Email: tdonohue@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member
students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG
may have clerked, interned or held various employment positions with firms held in UOIG’s porfolio. In addition, members of UOIG
may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Hansen Natural Corporation
Univer sit y of Or egon I nvest ment Gr oup
http://uoig.uoregon.edu
APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
In Thousands of Dollars
Total Revenue
% Growth
Revenue By Segment
Energy Drinks (DSD)
% Growth
Non-Carbonated Drinks
% Growth
Carbonated Drinks
% Growth
Cost of Sales
% of Revenue
Gross Profit
Gross Margin
Operating Expenses
Selling And Distribution Expenses
% of Revenue
General and Administrative Expenses
% of Revenue
Total Operating Expenses
Operating Income
Interest and Other Income, net
% of Revenue
Income Before Provision For Income Taxes
% of Revenue
Provision For Income Taxes
Tax Rate
Net Income
Net Margin
Add Back Depreciation: Depreciation and Amortization
% of Revenue
OCF
Current Assets
% of Revenue
Current Liabilities
% of Revenue
Net Working Capital
% of Revenue
Change in Net Working Capital
Capitol Expenditures
% of Revenue
Free Cash Flow
Discounted Free Cash Flows
2003
110,352
NA
2004
180,341
63.42%
2005
$348,886
93.46%
2006
$605,774
73.63%
2007
$904,465
49.31%
49,469
NA
31,416
NA
29,468
NA
66,577
60.33%
43,775
39.67%
113,050
128.53%
38,872
23.73%
28,419
-3.56%
96,875
53.72%
83,466
46.28%
$271,845
140.46%
$50,542
30.02%
$26,499
-6.76%
166,343
47.68%
182,543
52.32%
$518,998
90.92%
$60,151
19.01%
$26,625
0.48%
289,180
47.74%
316,594
52.26%
$813,525
56.75%
$62,269
3.52%
$28,671
7.68%
436,452
48.26%
468,013
51.74%
15,300
13.86%
18,587
16.84%
33,887
9,888
-67
-0.06%
9,759
8.84%
3,829
39.24%
5,930
5.37%
646
0.59%
6,576
26,678
24.18%
9,482
8.59%
17,196
15.58%
40,723
2,551
2.31%
-36,698
29,207
16.20%
20,300
11.26%
49,507
33,959
52
0.03%
33,938
18.82%
13,551
39.93%
20,387
11.30%
843
0.47%
21,230
60,380
33.48%
18,741
10.39%
41,639
23.09%
24,443
1,366
0.76%
-4,579
50,800
14.56%
28,300
8.11%
79,100
103,443
1,351
0.39%
104,794
30.04%
42,019
40.10%
62,775
17.99%
1079
0.31%
63,854
140,287
40.21%
32,957
9.45%
107,330
30.76%
65,691
2,162
0.62%
-3,999
95,300
15.73%
62,700
10.35%
158,000
158,594
3,660
0.60%
162,239
26.78%
64,290
39.63%
97,949
16.17%
1594
0.26%
99,543
257,157
42.45%
62,843
10.37%
194,314
32.08%
86,984
4,574
0.76%
7,985
237,027
230,986
8,770
0.97%
239,756
26.51%
90,350
37.68%
149,406
16.52%
2184
0.24%
151,590
270,149
29.87%
82,881
9.16%
187,268
20.70%
-7,046
6,767
0.75%
151,869
2008 Q1A 2008 Q2A 2008 Q3A
212,178
282,244
284,986
NA
NA
NA
190,176
NA
16,209
NA
5,793
NA
107,459
50.65%
104,719
49.35%
259,054
NA
15,521
NA
7,669
NA
136,031
48.20%
146,213
51.80%
258,110
NA
18,420
NA
8,456
NA
135,550
47.56%
149,436
52.44%
0.25
2008 Q4E 2008 E+A
302,085 1,081,493
NA
19.57%
1.25
2.25
3.25
4.25
5.25
6.25
7.25
2009E
2010E
2011E
2012E
2013E
2014E
2015E
1,357,678 1,716,292 2,156,625 2,651,671 3,162,348 3,713,057 4,325,686
25.54%
26.41%
25.66%
22.95%
19.26%
17.41%
16.50%
259,500
NA
19,600
NA
8,895
NA
145,001
48.0%
157,084
52.00%
966,840
18.85%
69,750
12.01%
30,813
7.47%
524,041
48.46%
557,452
51.54%
1,247,224
29.00%
77,423
11.00%
33,032
7.20%
624,532
46.00%
733,146
52.25%
1,596,446
28.00%
84,569
9.23%
35,278
6.80%
806,657
47.00%
909,635
52.25%
2,027,487
27.00%
91,639
8.36%
37,500
6.30%
1,035,180
48.00%
1,121,445
52.25%
2,514,083
24.00%
98,062
7.01%
39,525
5.40%
1,279,431
48.25%
1,372,240
52.25%
3,016,900
20.00%
103,946
6.00%
41,501
5.00%
1,533,739
48.50%
1,628,609
52.25%
3,559,942
18.00%
109,663
5.50%
43,452
4.70%
1,810,115
48.75%
1,902,942
52.25%
4,165,132
17.00%
115,146
5.00%
45,407
4.50%
2,119,586
49.00%
2,206,100
52.25%
167,631
15.50%
118,964
11.00%
265,058
292,394
10,506
0.97%
305,748
28.27%
115,495
37.80%
190,253
17.59%
4,044
0.37%
194,297
181,251
16.76%
93,646
8.66%
87,605
8.10%
0
16,146
1.49%
178,152
210,440
15.50%
149,345
11.00%
359,785
373,361
11,540
0.85%
380,150
28.00%
140,655
37.00%
239,494
17.64%
3,394
0.25%
242,889
380,150
28.00%
149,345
11.00%
230,805
17%
143,200
10,183
0.75%
89,506
76,164
266,025
15.50%
188,792
11.00%
454,818
454,818
14,588
0.85%
480,562
28.00%
177,808
37.00%
302,754
17.64%
4,291
0.25%
307,045
463,399
27.00%
188,792
11.00%
274,607
16%
43,802
12,872
0.75%
250,371
187,241
334,277
15.50%
237,229
11.00%
571,506
549,939
18,331
0.85%
603,855
28.00%
223,426
37.00%
380,429
17.64%
5,392
0.25%
385,820
560,723
26%
237,229
11.00%
323,494
15%
48,887
16,175
0.75%
320,759
210,821
411,009
15.50%
291,684
11.00%
702,693
669,547
22,539
0.85%
742,468
28.00%
274,713
37.00%
467,755
17.64%
6,629
0.25%
474,384
636,401
24%
291,684
11.00%
344,717
13%
21,223
19,888
0.75%
433,273
250,274
490,164
575,524
15.50%
15.50%
347,858
408,436
11.00%
11.00%
838,022
983,960
790,587
918,982
26,880
31,561
0.85%
0.85%
885,457 1,039,656
28.00%
28.00%
327,619
384,673
37.00%
37.00%
557,838
654,983
17.64%
17.64%
7,906
9,283
0.25%
0.25%
565,744
664,266
758,963
891,134
24%
24%
347,858
408,436
11.00%
11.00%
411,105
482,697
13%
13%
66,388
71,592
23,718
27,848
0.75%
0.75%
475,638
564,826
241,463 252,004
670,481
15.50%
475,825
11.00%
1,146,307
1,059,793
36,768
0.85%
1,211,192
28.00%
448,141
37.00%
763,051
17.64%
10,814
0.25%
773,865
1,038,165
24%
475,825
11.00%
562,339
13%
79,642
32,443
0.75%
661,781
259,493
61,891
42,828
3,626
1.71%
46,454
21.89%
17,653
38.00%
28,801
13.57%
730
0.34%
29,531
51,175
68,023
78,190
2,769
0.98%
80,959
28.68%
30,683
37.90%
50,276
17.81%
1,539
0.55%
51,815
182,953
67,644
81,792
2,111
0.74%
83,903
29.44%
31,464
37.50%
52,439
18.40%
1,020
0.36%
53,459
477,245
67,500
89,584
2,000
0.66%
94,432
31.26%
35,695
37.80%
58,737
19.44%
755
0.25%
59,492
181,251
93,140
105,262
88,355
93,646
-41,965
-20%
-229,233
886
0.42%
257,878
77,691
28%
119,656
1,927
0.68%
-69,768
388,890
136%
311,199
11,067
3.88%
-268,807
87,605
29.00%
-301,285
2,266
0.75%
358,511
347,122
12
Hansen Natural Corporation
Univer sit y of Or egon I nvest ment Gr oup
http://uoig.uoregon.edu
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
ASSUMPTIONS
Tax Rate
Risk Free Rate (5 Year Bond)
Market Risk Premium
Beta
Cost of Equity (CAPM)
% Equity
Cost of Debt
% Debt
WACC
Terminal Growth Rate
37.00%
3.14%
7.00%
1.52
13.78%
100.00%
4.66%
0
13.78%
3.00%
DCF Implied Price
Comparable Implied Price
Weighted Implied Price
Current Price
Undervalued
PV of Future Cash Flows
Terminal Value
PV of Terminal Value
Firm Value
Long Term Debt
Equity Value
Shares Outstanding
Implied Share Price
Current Share Price
Under (Over) Valued
Prices
46.68
9.70
39.29
27.82
41.21%
1,824,583
6,320,793
2,478,465
4,303,048
0
4,303,048
92,179
46.68
27.82
67.80%
Weight
80.00%
20.00%
100.00%
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
Beta
2.88
2.54
2.2
1.86
1.52
1.18
0.84
0.5
0.16
St. DeviationImplied Price
2 SD
27.77
1.5 SD
30.20
1 SD
33.65
.5 SD
38.75
0 SD
46.68
-0.5SD
60.01
-1SD
85.41
-1.5SD
147.09
-2SD
452.01
Undervalued
-0.18%
8.55%
20.97%
39.29%
67.80%
115.71%
207.00%
428.71%
1524.76%
13
Hansen Natural Corporation
Univer sit y of Or egon I nvest ment Gr oup
http://uoig.uoregon.edu
APPENDIX 5 – SOURCES
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Hansen Natural 2007 Annual Report
Reuters
Beverage Spectrum
Pondel Wilkinson
Yahoo Finance
AOL Finance
Factset
SEC
BevNet
MG
Beverage Digest
YCM Report
2008 Energy Drink Guide
Previous Hansen Natural Report
Energyfiend.com
Ajc.com
Csnews.com
Rimag.com
14