Hansen’s stock price target is $39 based on applying a 15x multiple to its earnings over the next year and adding its net cash per share of $3.46. A 15x target multiple appears appropriate based on its ability to grow its sales and earnings in the low to mid teens over the next several years.
The stock should be accumulated in stages (25% or 33% of planned total position size purchased initially) given its volatility and potential overreactions associated with its short-term sales results in current challenging economic environment.
Company Description
Hansen Natural Corporation develops and markets energy drinks, natural sodas and juices and is headquartered in Corona, California. Hansen has two reportable segments: Direct Store Delivery (DSD), whose principal products are energy drinks, and Warehouse, whose primary products include natural sodas and juices. The DSD segment utilizes distributor networks and the Warehouse segment sells directly to retailers. The distribution of its energy drinks in the U.S. and Canada are almost equally divided between Anheuser Busch distributors (to on premise retailers, including bars and nightclubs) and Coca-Cola bottlers (to traditional food and beverage retailers).
The company is the #2 player (28% market share) in the $6.5 billion U.S. energy drinks retail market. Its energy brands include Monster Energy, Monster Khaos, Monster Assault, Monster M-80, Monster Heavy Metal, Monster MIXXD, Lost Energy and Joker Mad Energy. Approximately 90% of Hansen’s sales and 95% of its operating profit is generated from its energy drink products.
Hansen outsources the manufacturing and packaging of its products to third party bottlers and contract packers. The company purchases concentrates, juices, flavors and packaging materials and delivers them to its bottlers and contract packers. One of the benefits of outsourcing is that the company can introduce new products quickly at a fairly low cost since it does not have to build manufacturing capacity and bring on more workers. Hansen has a small labor force of about 900 employees, 700 of which are in sales and marketing.
Hansen markets its Monster Energy drinks to target demographic of 18 to 30 year old males who are into action sports and rock music. The company does not use mass media marketing, such as television ads or billboards. Instead, Hansen focuses on sponsoring athletes, artists, tours and events to target its young male demographic. Hansen recently signed Valentino Rossi, the world champion MotoGP racer, to a sponsorship deal, which should help the company gain market awareness in Europe and Australia.
Its customers include Coca-Cola Enterprises, Wal-Mart (11% of sales), AB Distributors, Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Costco, The Kroger Co., Safeway and Albertsons.
2008 Customer Mix
Source: Hansen 2008 10K
Competition
Hansen’s competitors in the energy drink segment include Red Bull GmBH, Pepsi (Amp, SoBe No Fear, SoBe Adrenaline Rush), Rockstar, Coca-Cola (Full Throttle, NOS) and Anheuser Busch (180). Rockstar is distributed by Coca-Cola and Pepsi has decided to focus its resources on Amp, at the expense of its SoBe energy products.
Its competitors in the natural soda category include Coca-Cola, Pepsi, Cadbury Schweppes, Jones Soda, Clearly Canadian Beverage Company and Crystal Geyser. Hansen’s competitors in the juice segment include Tropicana, Tree Top, Mott’s, Martinelli’s, Welch’s, Ocean Spray, Minute Maid, Langers, Apple and Eve and Juicy Juice. Its competitors in the coffee beverage market include Starbucks, Rockstar Roasted, Caribou Coffee and Godiva.
Industry Overview
U.S. retail sales of energy drinks have more than tripled since 2003 to $6.5 billion in 2008 according to Beverage Digest.
Monster's U.S. market share in the energy drink category increased by 0.8% to 28.4% while Red Bull’s market share dropped 0.2% to 35% for the 13 weeks through June 27, 2009 according to Nielsen Reports. Rockstar's market share decreased 0.8% to 10.7%, Amp's market share decreased 0.6% to 7.3%, Full Throttle's market share decreased 0.5% to 4.3% and NOS's market share increased 1% to 3.6%.
Monster is the #2 leading energy drinks product trailing only Red Bull in the majority of international markets in which it participates.
Sports drinks, such as Gatorade and Powerade, nearly doubled sales volume during four year period from 1992-1995. The category continued to grow at 9% rate over subsequent 13 years, significantly faster than 2%-3% growth in overall non-alcoholic beverage category. Some industry experts expect energy drinks to follow similar course and predict that energy drinks will resume mid-to-high single digit growth following recovery in U.S. economy.
Earnings Model
Financial Results
Sales Growth
In 2007, net sales grew 49.3% benefiting from volume sales growth of 35.3% and price per case increases of 10.3%
- Net sales growth was driven by Monster Energy, Java Monster (coffee drinks) and new energy products including M-80, MIXXD and Heavy Metal
- Net sales growth was driven by Monster Energy, Java Monster and new energy products, including Shooter, MIXXD and Heavy Metal
- Net sales growth should be driven by Monster Energy, Java Monster, Monster Expresso and Monster shot products in the U.S. as well as growth in international markets
In 2007, gross margin decreased to 51.7% from 52.3% in the prior year due to sales mix (increased sales of certain energy drink packages with lower gross margins) and to higher raw material costs. Operating margin also decreased to 25.5% in 2007 compared with 26.2% in 2006 owing to lower gross margin and slightly higher operating expenses (warehousing, marketing and payroll) as percentage of sales.
In 2008, gross margin increased to 52.1% from 51.7% in the prior year due to accelerated revenue recognition associated with termination of certain distributors during fourth quarter and sales mix benefits, both of which were only partially offset by higher raw material costs. Operating margin decreased to 15.8% in 2008 compared with 25.5% in 2007 due largely to costs associated with terminating existing distributors. Excluding these costs, operating margin would have increased to 27.2% in 2008.
In 2009, I expect gross margin to increase to 52.5% from 52.1% in the prior year benefiting from lower raw material prices. I expect operating margin to increase to 29.4% benefiting from gross margin improvement and lower operating expenses as a percentage of sales.
Investment Rationale
Gaining market share in U.S. energy drink market
- Hansen’s market share increased to 28% in the second quarter of 2009 according to Nielsen Reports from 19% in 2005 according to Beverage Digest
- The company has been able to gain share over Red Bull due to its strong new product introductions, unique marketing strategy and its distribution agreements with leading players, such as Coca-Cola and Anheuser Busch
- Hansen should continue to gain share in the second half of 2009 due to introduction of Monster Expresso, Monster Import and Nitrous products
Source: UBS
Good growth in energy drink market
- The energy drink market should continue to grow more rapidly than the overall non-alcoholic beverage market over the next several years following the growth path of similar innovative product lines in the past, such as sports drinks
- Although growth in the blue collar segment (truck drivers and construction workers) has decreased in the past year due to the economic downturn, demand should reaccelerate with economic recovery since Monster products provide energy that traditional drinks do not
International expansion
- Hansen announced a distribution agreement in Europe with Coca Cola Company and Coca-Cola Enterprises in October 2008
- The agreement covers France, the United Kingdom, the Netherlands, Belgium, Luxembourg and Monaco
- Initial results have been extremely positive in all regions except for the UK where alternative energy products are already well established
- The company also has distribution agreements in Spain, Italy and New Zealand with smaller distributors
- Hansen recently entered a distribution agreement with Comercializadora Eloro, a subsidiary of Grupo Jumex, for exclusive distribution of its energy drinks throughout Mexico
- Jumex is the largest juice producer and distributor throughout Mexico
- Monster is currently the #2 player in Mexican energy drink market
- The company also recently signed new distribution agreements in Australia and Brazil and expects to start selling in these markets in the second half of 2009
- The international energy drink market is estimated to be approximately $5 billion in size, so Hansen’s presence in this market nearly doubles its addressable market
- During 2008 and the first half of 2009, international sales accounted for 8% and 12% of its respective sales
Opportunity to gain share in higher-margin, faster-growth energy shots market
- The energy shots market is approximately a $500 million market according to Beverage Digest
- Hansen entered the market in September 2008 with its Hitman Energy Shooter product and introduced Monster Sniper and Monster LoBo shooters in the first quarter of 2009
- The company should continue to gain share in this category in upcoming quarters
Strong balance sheet
- Hansen does not currently have any debt and has $313 million in net cash
- The company’s stock price could appreciate $5 to $10 per share if Hansen decides to take on debt depending on the amount of debt it takes on and the number of shares it repurchases
Potential acquisition target
- Coca-Cola and PepsiCo have already looked closely at acquiring the company and Dr. Pepper Snapple’s CEO recently commented that the company has been for sale for a while
Concerns and Risks
Declining sales growth
- Hansen’s net sales have grown in the single digits in two of the last three quarters owing to deteriorating U.S. economy and weaker economy in California that contributes roughly 20% of sales
- I expect sales growth to improve in 2010 as the economy recovers
Increased competition
- The alternative beverage segment, which includes energy drinks, is the fastest growing category of the beverage industry
- Strong growth rates have attracted attention and introduction of copycat products by major beverage players
- Fortunately, the two biggest players in energy drinks, Red Bull and Monster, are not discounting and want to maintain premium pricing
- Hansen’s CEO said “Red Bull has done a very good job of keeping its pricing premium and keeping the category premium. We don’t believe Red Bull will resort to discounting and we don’t think we will” at a shareholder meeting in June 2009
Volatile stock price sensitive to short term sales results
- In the last 2 weeks of May 2009, Hansen’s sales were disappointing due to slower than anticipated sales growth in international markets and challenges associated with new distribution system in U.S. (shifted some distribution to select Coca-Cola bottlers and new Anheuser Busch distributors)
- Its stock fell 11% as a result and might be prone to similar overreactions in the future
Higher commodity prices
- It gross margin might be hurt by higher aluminum, apple juice, milk and sugar prices as global economic growth improves
- Packaging costs account for about 70% of total costs of goods sold and aluminum is primary packaging component
Valuation
Comparable Valuation Analysis
- Hansen is trading at a 17% discount to its peers based on 2009 EV/EBITDA multiples and an 8% discount to its peers based on 2009 P/E multiples despite its stronger estimated sales growth and similar profitability ratios
Source: Bloomberg
M&A Valuation Analysis
- Recent beverage acquisitions include Tropicana (acquired at 12.4x EV / trailing EBITDA multiple), Snapple (13.1x EV / trailing EBITDA multiple) and Glaceau, manufacturer of Vitamin Water (30x EV / trailing EBITDA multiple)
- Cascadia Capital conducted a survey on beverage M&A activity between 2006 and 2008 and determined that the mean EV / trailing EBITDA multiple was 11.8x
- Hansen’s current EV / trailing twelve months EBITDA is 10.6x
- The following table shows the potential upside to Hansen’s stock price associated with different EV / trailing EBITDA acquisition multiples
Price Target
Hansen’s stock price target is $39 based on applying a 15x multiple to its earnings over the next year and adding its net cash per share of $3.46. A 15x target multiple appears appropriate based on its ability to grow its sales and earnings in the low to mid teens over the next several years.
The $39 price target would also equate to a 12.4x EV / trailing EBITDA multiple, which appears to be a fair acquisition multiple for Hansen based on past deals.
The stock should be accumulated in stages (25% or 33% of planned total position size purchased initially) given its volatility and potential overreactions associated with its short-term sales results in current challenging economic environment.
Full Disclosure
Recommended to Bolter and Company, a NY-based investment management firm, on August 12, 2009
No current positions in family accounts
