I mentioned Monster Beverage (MNST) in a November article as a selection with both defensive characteristics during recession and offensive growth prospects to reach for equity appreciation over time. Beverage demand has held up during the COVID-19 pandemic shutdowns and stay-at-home orders, while Monster’s grocery store and gas station sales channels have benefited. The stock quote has performed remarkably well during the coronavirus panic sell-off and sharp rebound reality of 2020. Rising from $57 a share eight months ago to $71 today, Monster’s +25% gain has far outpaced the equivalent S&P 500 total return of +6%. Can the advance continue?

Image Source: Company Presentation

The answer is yes, for two reasons. First, Monster has been rapidly expanding in markets outside the United States. It has distribution agreements with Coca-Cola (NYSE:KO) system bottlers and a number of independent overseas bottlers to now reach 153 countries and territories worldwide. The push to dominate energy drinks globally has already boosted revenue and income growth. During 2019, fully 33% of sales originated outside the U.S., up 5% from 2017. In terms of incremental sales and income expansion, foreign demand has led the way.

Image Source: Company Presentation

Second, new drinks especially alcoholic choices may soon open up enormous growth potential. Management talked about the increasing odds of its entry into alcoholic and cannabis beverages last year in a Wall Street Journal article. Bars and individuals have mixed Monster energy beverages with alcohol for years. However, Monster has been under a non-compete contract with Coca-Cola that prevents the brand from introducing any non-energy drinks until later in 2020. The first new entry is anticipated to be a seltzer. Last week, Stifel analyst Mark Astrachan mentioned the added value such a product would have for sales at the company, sold through a large national beer distributor.

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With roughly half of Wall Street analysts rating the company a hold or sell, just like in November, not much upside is expected from Monster. To me, this is a great contrarian signal; any good news will bring a steady flow of investment capital and higher stock quotes over time.

Image Source: Seeking Alpha Sell-Side Ratings Page

Valuation Story

Monster remains one of the most profitable operating businesses in the beverage industry, and its entry into alcoholic beverages wouldn’t change Wall Street’s equity valuation much.

Below is a graph of the desirable, super-high net profit margins the company has generated the last decade vs. competitors and peers in both beverage markets. PepsiCo (PEP), Coca-Cola, Keurig Dr. Pepper (KDP), National Beverage (FIZZ), Anheuser-Busch InBev (BUD), Molson Coors (TAP), Diageo (DEO) and Constellation Brands (STZ) are included in the sort group.

If growth continues or accelerates from an expansion in its overseas footprint and the introduction of drinks in new categories, Monster’s current valuation is very attractive. Below you can review some basic fundamental ratio analysis over the last decade. Analyzing trailing price to earnings, sales, cash flow and book value, Monster looks to be in a fair to undervalued range right now. Contemplating most every publicly-traded business in America is either overvalued or on the high end of its 10-year historical valuation range in July 2020, shares may actually be a “relative” long-term bargain around $70.

Versus an expected 20-30% decline in earnings for the typical U.S. business in 2020, Monster’s results are predicted to grow this year, and grow again in 2021. Below are the current Wall Street EPS estimates for the company.

Image Source: Seeking Alpha Earnings Page

Another reason for Monster’s higher-than-typical valuation on operating results is its stellar and liquid balance sheet. I rate the balance sheet a rare A+ for strength with $2 billion in cash and current assets vs. just $1 billion in total liabilities. Honestly, few other American businesses today are structured for all income generation to flow directly to shareholders, not debt holders, pension liabilities, environmental clean-up, future rents or other obligations.

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Strong Technical Picture

My momentum indicators overall have moved into a very positive phase. Below you can see the outperformance trend vs. the S&P 500 since November, with a +3.5% relative gain the last 12 months, circled in green. The Accumulation/Distribution Line (ADL) has been quite strong since late 2019, marked with a red arrow. ADL measures the closing price each day vs. the session’s trading range. When the close is nearer the high trade of the day, the line is climbing. Plus, On Balance Volume (OBV) has been steadily rising in a healthy fashion the whole period pictured. OBV is a simple calculation of price change multiplied by volume daily, added or subtracted from the previous session.

Final Thoughts

If your investment goal is price appreciation, with a defensive-product bent, buying Monster shares looks like a smart decision. Energy drinks continue to be big sellers, even during the coronavirus pandemic recession of 2020. Owning a high-margin, better-than-average growth selection at a reasonable price should also allow this equity to outperform the S&P 500 index into the future.

Monster’s best fit in portfolio design may be as an “outperformance” long in a diversified and hedged long/short portfolio. For investors, the position would be viewed as a winner if it falls less or rises more than the S&P 500. Used in this portfolio format, the company’s defensive characteristics will help tremendously under a large bear market or crash scenario. On the upside, expanding business growth should support high valuation multiples over time. Yes, Monster Beverage may be just the medicine for your portfolio during the pandemic. Vaccinations are available, when you uncover the right opportunities.

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Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is suggested before making any trade.

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Disclosure: I am/we are long PEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I/we may initiate a long position in MNST over the next 72 hours.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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