Introduction:

The best-performing stock of the past 20 years which increased in price by about 875x is not a tech stock but rather it was MNST. (SOURCE) This strong performance is attributed to the rising caffeine consumption, superior distribution network, and the branding associated with Monster Energy. Monster Energy has successfully seeped into the lives of youths, associating itself with "masculinity" evident from their support for extreme sports such as F1 and MMA. Recently, MNST has even managed to acquire its competitor BANG at a steep discount allowing MNST to expand its brand image to appeal to a wider audience.

Investment Thesis:

Diverse Product Innovations

In recent years, MNST has significantly broadened its product range, extending from coffee-infused energy drinks to alcoholic beverages. This strategic diversification reflects MNST's commitment to meeting the varied needs of its customer base. I believe that the greatest potential for MNST lies in targeting the working class in developing countries. This demographic is typically more price-sensitive when selecting energy drink brands. MNST's value brands, such as "Predator" and "Fury," are well-positioned to cater to these consumers' preferences. In contrast, Redbull's focus on brand reputation has resulted in a narrower range of energy drink options. This difference provides MNST with a competitive edge, allowing it to attract a broader spectrum of consumers by offering products tailored to diverse needs and budgets.

Strong Supply Chain

MNST has strong connections with their manufacturers and distributors which allows for the business to operate like a well-oiled machine. MNST acquired its main syrup manufacturer American, Fruits and Flavours (AFF) back in 2016 (SOURCE) “The acquisition brings Monster's primary flavor supplier in-house and secures Monster's ownership of the unique intellectual property created with AFF for its flagship Monster Energy® energy drinks as well as several other key flavors in its beverage portfolio.” On top of that, as of February 2024, MNST has sold about 20% of its stake to Coke (KO). This gave MNST access to the world-class distribution network that KO has created. KO even agreed that the only energy drink it will distribute is from MNST.

Strong Branding

MNST has partnered with brands across extreme sports such as F1 and MMA to raise brand awareness and to build their brand's association with these hyper-masculine sports. On top of that MNST has recently taken over Bang a brand that is associated with Gen Z as it gained mass popularity from being featured by content creators on TikTok. This multi-faceted branding approach allows MNST to target a much wider audience than any other brand can target.

Market:

The US and the UK are the top 2 countries in terms of volume of energy drinks sales per capita. (SOURCE) Whereas China is only top 9th, this is despite China being the target audience for energy drinks.
Energy drinks in China cost about RMB 5, in the US it's about USD 2.5. However, if we compare this amount to the median monthly income in both countries. For the US, 1 can of energy drink represents about 0.04% median monthly income. Whereas for China, 1 can represent 0.1% median monthly income. So, Chinese consumers are likely to be more price-conscious than the US.
This is why brands like Red Bull are glorified especially on douyin (the Chinese version of TikTok), not only because of their high price tags but also because they are perceived to be of higher quality because it is made from the West. The lack of budget-friendly "premium" energy drinks from the West creates a group in the market that is underserved. Luckily for MNST, they can maintain their premium status while still appealing to price-conscious consumers through their budget-friendly brands Predator and Fury.
In the UK, Red Bull has a brand recognition of 94% compared to MNST at 90% (SOURCE). UK consumers choose which brand to consume based on familiarity and brand loyalty (SOURCE). I believe that MNST with its diverse product range for every consumer will slowly seep into every facet of the UK consumer’s life and build brand familiarity over time. Whereas Red Bull only releases 1 line of products to maintain their product’s “premium” aura and appeal to only a narrow pool of consumers. Over time I believe MNST's strategy of multi-brands will build more overall brand familiarity and goodwill.

Revenue:

Energy drinks were initially created to target the working class population, meant to provide a temporary quick energy boost due to how physically intensive their work is. In these less well-off countries, workers drink energy drinks over alternatives like coffee as energy drinks are easier to consume on the go. The main consideration of the brand of energy drink that consumers consume is less about what the brand stands for but rather how effective or how much value they can derive. However, Redbull is the dominant energy drink brand in China (SOURCE) as it had a strong first movers advantage when it entered the China market in the 1990s compared to MNST which only entered in 2016 (SOURCE).

In more developed economies, energy drinks are a lifestyle choice, people choose their brand of energy drinks based on what values these brands represent and what they resonate with. MNST and Red Bull the 2 largest energy drink brands have a target demographic of 18-34 year-old males due to their association of the brands with masculinity (SOURCE). However, certain countries where the coffee culture is stronger e.g. the Philippines, which was ranked 2nd for most coffee consumed in Asia (SOURCE) conversely had < 30% of its population consuming energy drinks regularly (SOURCE).

When forecasting Monster Energy Case Sales, I believe that MNST is currently in the process of building up brand goodwill in the new markets it has moved into e.g. China, India, and SEA. I believe that historic growth will taper to a limited amount in the short term while MNST builds up brand goodwill. I assumed that it took 3 years to build up strong brand goodwill and for the supply chain constraints to normalize. As MNST starts having a stronger presence in the markets it newly entered the sales will begin accelerating.

When forecasting the Sales/Monster Energy Case, management has stated that they intend to raise prices per case to keep up with inflationary pressures. Opting for less granularity I forecasted it as a %of historic long-term inflation for my entire forecast period. I also believe that management is unable to raise prices to a very significant extent as MNST is very conscious about not overpricing its products relative to Red Bull.

When forecasting Strategic Brands, historically the Y/Y growth was due to the momentum from entering new markets in APAC and brand recognition from the Winter Olympics. I assumed that the high double-digit Y/Y growth would taper down over time.

When forecasting Strategic Brands Sales per Case, opting for less granularity I forecasted it to grow in line with perpetual inflation. To avoid being overly optimistic or pessimistic in my forecast, I kept Strategic brands as a fixed % of monster energy revenue, this percentage remained constant historically.

When forecasting Alcohol and Others, this portion contributes a minuscule amount of total revenue at about 2%. Opting for less granularity, I forecasted it as a %of monster energy and kept it constant over time.

Cost:

Management believed that gross profit in 2022 was lower due to the higher cost of raw materials, and since they got more inventory part of the increase was warehouse cost as well.
COGS includes the cost of the concentrate, syrup, other packaging materials, and distribution costs such as warehouse and freight.

When forecasting COGS, I assumed that COGS would taper downwards to slightly higher than pre-covid levels over time. However, COGS will not return to pre-COVID levels as MNST now has a higher level of inventory compared to pre-COVID due to higher revenues and moving to new markets. They also acquired more brands which adds on more cost.

When forecasting Operating Expenses, I believe that during the first half of my forecast, MNST will spend more on marketing as it has to support the release of MNST’s brands in new markets, before it tapers back down to slightly higher than historic averages due to it needing to maintain brand goodwill for multiple brands in multiple markets.

WACC:

10Y T-Bond Yield (1M Avg) = 4.20%
RFR = 4.20%
Beta (SOURCE) = 0.71
Stable Market ERP (SOURCE) = 4.60%
COE = 7.47%
MNST has no bond rating, so I will be using a synthetic rating (SOURCE)
FY22 Interest Exp = 0.431M
FY22 EBIT = 1584.721M
MNST has an interest coverage ratio > 8.50 so it is rated AAA
COD = 4.20%
Marginal Tax Rate = 21.00%
AT-COD = 3.32%
Stock Price (5D Avg) = $55.43
Shares O/S = 1040.44M
Market Value of Equity = 57671.59M
MNST is fully funded by Equity with only a revolving credit line as their main debt financing.
WACC = 7.47%

Conclusion:

Ultimately, in my base case, I value MNST at $51.85 per share. Even though I believe that MNST is a strong company with multiple high-quality brands that have large growth potential. However, I believe that the uncertainty of whether consumer's taste and preference will shift, potential regulations that could affect the bottom line of MNST, and the recent hype surrounding MNST leads to their stock being slightly overvalued.

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