Hansen Natural Corp (HANS)

Here’s why Hansen’s is a great company to own at these price levels.

The energy drink market is growing rapidly. Goldman Sachs and Mintel Research predict it will be a $10 billion market by 2010. (almost double from now).

The leader in market share is Redbull with 43%, but is privately held.

The next largest market share leader is the Monster Energy drink brand. It continues to gain market share and accounts for 17% of the market sales. Hansen’s owns the Monster Brand and it is publicly traded. Additionally, this Monster Energy brand is Hansen’s primary revenue source.

Here is the growth of Hansen’s DSD (direct store delivery (which is their energy drinks)) over the past 4 fiscal years:

$49M 2003
$113M 2004
$270M 2005
$519M 2006

As you can see, the DSD #’s have been growing extremely fast.

This is the company to own for exposure to energy drinks because Hansen’s is still relatively small. Its market cap is just over $4 billion compared to Pepsi’s mkt cap of $127.B and Coca-Cola’s of $148.B. Both those companies have exposure in the energy drink market (with their Sobe Energy, Full Throttle Energy etc.) however, those companies are just too large for their energy drink brands to have much of an impact upon.

Competition

There is tons of competition in this field (with well over 100 brands being sold), however, the market leaders of yesterday, are still the market leaders of today, and will continue to be the market leaders in the future due to their brand recognition and loyalty. It is very much similar to the cola market in the earlier part of the last century. Hundreds, if not thousand of cola brands have existed, yet Coca-Cola and Pepsi have dominated the market. This is not a result of being able to sell their product for less, but a result of being able to sell their products regardless of competitor’s pricings due to their brand loyalty. Monster Energy has this brand recognition and loyalty. Here is a piece by the vice chairman at Berkshire Hathaway on this concept:

Charles T. Munger

From his speech at The University of Southern California Marshall School of Business, April 14, 1994

A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management and Business

“And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know that Wrigley is a satisfactory product whereas I don’t know anything about Glotz’s. So if one is forty cents and the other is thirty cents, am I going to take something I don’t know and put it in my mouth –which is a pretty personal place, after all- for a lousy dime?

So, in effect, Wrigley, simply by being so well known, has advantages of scale –what you might call an informational advantage.

Another advantage of scale comes from psychology. The psychologists use the term “social proof.” We are all influenced –subconsciously and, to some extent, consciously- by what we see other do and approve. Therefore, if everybody’s buying something, we think it’s better. We don’t like to be the one guy who’s out of step.

Again, some of this is at a subconscious level, and some of it isn’t. Sometimes, we consciously and rationally think, “Gee, I don’t know much about this. They know more than I do. Therefore, why shouldn’t I follow them?”

The social proof phenomenon, which comes right out of psychology, gives huge advantages to scale –for example, with very wide distribution, which of course is hard to get. Once advantage of Coca-Cola is that it’s available almost everywhere in the world.

Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup –which is slowly won by a big enterprise - gets to be a huge advantage… And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you.”

As an Investment

Do you know which stock has been the best performing stock over the past decade? It is Hansen’s, and by a very wide margin. All due to their Monster Energy brand. So, is it too late to invest in this company? I thought so until I read this by Warren Buffett on the results of the performance of Coca-Cola which has been a long term holding of his. I see this directly translating to the Hansen’s company today.

Warren E. Buffett

The Essays of Warren Buffett

Debunking Standard Dogma

“Earlier I mentioned the financial results that could have been achieved by investing $40 in The Coca-Cola Co. in 1919. In 1938, more than 50 years after the introduction of Coke, and long after the drink was firmly established as an American icon, Fortune did an excellent story on the company. In the second paragraph the writer reported: “Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola’s record, but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him.”

Yes, competition there was in 1938 and in 1993 as well. But it’s worth nothing that in 1938 The Coca-Cola Co. sold 207 million cases of soft drink and in 1993 it sold about 10.7 billion cases, a 50-fold increase in physical volume from a company that in 1938 was already dominant in its very major industry. Nor was the party over in 1938 for an investor: Though the $40 invested in 1919 in one share had (with dividends reinvested) turned into $3,277 by the end of 1938, a fresh $40 then invested in Coca-Cola stock would have grown to $25,000 by yearend 1993.”

Valuation

Here is by far the most important aspect of this investment.

The historical average earnings multiple for the market is basically 15. A number of factors determine whether the market pays a premium earnings multiple above this, or awards a discount to. The father of value investing describes these factors best:

Benjamin Graham Security Analysis

The multiplier takes into account a large number of value elements, such as the expected stability of earnings, the expected growth factor, the expected dividend policy…

The chief factors that govern the average or characteristic price-earnings ratios for a given stock may be listed in the following order:
1. Those factors that are fully reflected in the financial data (tangible factors)
a. The dividend rate and record
b. Profitability –rate of return on invested capital
c. Stability of past earnings
d. Growth of sales and earnings in the past
e. Financial strength or credit standing
2. Those factors that are reflected to an indefinite extent in the data (intangible factors)
a. Nature and prospects of the industry
b. Competitive position and individual prospects of the company
c. Quality of management

Hansen’s absolutely deserves a large premium due to these factors. (you can call me if you need the reasons explained).

As of right now, there is no premium being given to the forward earnings multiple of Hansen’s in relation to their peers of Coca-Cola and Pepsi. Due to the nature of this industry, we can half-way trust analyst estimates for future earnings (unlike cyclicals such as the financial industry in which analysts can be off by an incredible amount as represented by Bear Sterns enormous recent quarterly loss of $6.90 a share when the Thompson analyst consensus was for a loss of just $1.79 a share).

Currently the forward earnings multiples are:
Hansen’s: 21x
Coca-Cola’s: 21x
Pep: 21x

(The premiums to the market are justified due to the fact consumer staple companies are awarded a premium when the fear of a recession is lingering –because their earnings will still exist where earnings of cyclicals may disappear completely when a slow-down occurs)

All fair right? No!, Hansen’s is growing substantially faster than their competitors and thus deserve to be valued at a higher earnings multiple. Next years earnings are expected to again grow by over 40%, while PEP and KO are expected to just grow earnings by 10% and 12%.

Additionally Hansen’s deserves an earnings multiple premium due to the fact that they could be acquired similarly to the recent Glaceau acquisition by Coca-Cola for $4.1 billion (which was over 6 times revenues). If a similar buyout happened with Hansen’s, their 2007 revenues of $870m would value the company at over $5.2 billion.

Forgetting about being acquired, we can come to a better technique for what the stock should be at in 1 year. We will simply take legendary investor: Peter Lynch’s advice as to what earnings multiple should be applied: (which I feel is appropriate for this company)

From One up On Wall Street:

The P/E ratio of a company that’s fairly priced will equal its growth rate. I’m talking about growth rate of earnings here.

So, even if we discount Hansen’s 40% earnings growth, and award a multiple in 1 year of 30 x earnings. We arrive at a price of:

30 x $2.09 (the average analyst estimates for 2008)
= $62.70

This is 53% higher than the current price of $41.

Hansen Corporation is a 70+ year old, innovative beverage company, that has been the the best performing stocks over the last 9 years, giving investors more than 24,000% returns. Hansen Corp. owns key businesses such as Monster Energy, Juice Blast, Blue Sky, Lost, Rumba, and of course the Hansen brand.

Hansen has consistently beat anaylst's expectations, recently they beat EPS expectations by $0.13, making $0.74 per share (Up more than 120% YOY).

Hansen's CEO has been in that position since 1990, and other key board members have been with the company for at least 7 years.

HANS is well positioned in the rapidly expanding energy drink market which has allowed it to post 80% plus growth rates for the past two years. While the market is currently concerned about the ability to continue at that growth rate, resulting in a recent 50% decline in the stock price, HANS continues to be a tremendous growth story. The recent distribution deal with BUD will allow for greater market penetration and further growth in revenue and sales. While Red Bull is the leader in the energy drink industry, they continue to lose market share to the multiple choices offered by HANS, and Red Bull lacks the other products that give HANS greater product depth. I see this company continuing its tremendous growth prospects in the near term, with superior growth for several years. I expect it to outperform in the short and long term. Fundamentals are strong, debt is low, and this company is currently a cash cow.

Three years ago, Hanson was selling for the equivalent of a couple of bucks a share. It turned into an Investor's Business Daily momentum stock on the strength of it's #2 (and rising) status in the red hot energy drink market (growing at 50% a year). Last summer it topped out in the low 50's and corrected back to 27 (where I bought it in the real world). HANS proceeded to run up to 42 on the strength of an improving story: The company has initiated distribution in the U.S. by Budweiser; in Canada by Pepsi; and in Mexico by Cadbury Bebidas. Yesterday, brokerage downgrades (based on valuation) knocked the stock down 10%, from 42 to 37.7 where I think it's a buy.

Why? It's currently the fastest-growing brand in a fast-growing category. It has powerful consumer appeal because it offers double the fluid ounces for the money as the #1 brand, Red Bull. In addition, Hanson is in about 70% of appropriate retail outlets and is targeting 90%. Morningstar estimates it has an ROI of 125%, so they've got an incredible money machine.

Of course there are some caveats. The best one,
speaking as an opportunist who enjoys buying great companies at bargain prices, is a possible buying opportunity if the SEC decides to investigate the company's options-dating practices.
So, although I like Hanson at 37, I'd like it even better back at 27.

The stock is expected to earn around $1.53 or $1.54 in '07. Interestingly, Thomson Financial is
projecting growth at about 32% while Morningstar more conservatively projects growth of 20%. That's a huge disparity. Based on the growth factors outlined above, I think Morningstar's number
seems conservative.

I think the stock is high odds to test 51 again and has 37% upside potential from here. Sure, it could be a yo-yo, but it's probably one of the most explosive stories in the consumer end of the food business. The IBD momentum crowd is waiting to see if the stock breaks out over it's summer highs. Why not enjoy a Valentine's Day gift from Goldman Sachs and J.P. Morgan (which recently downgraded the stock) that could be worth 37% to you over the next couple of months?

And, if the SEC investigates, I'll be waiting for an even better buying opportunity.

I don't go much for fancy number readin'... But I'll tell you one thing. When I look around I don't see kids walkin around drinkin cokes - I see "Monster" and "Redbull" and "Rip It" "Bootie Sweat" and other rediculous energy drinks.

D-bags who want to be "extreme" but still have training wheels attached to their bikes can trick people by being seen drinking this.

Also, with today's "I'm a victim" mentality - everyone relishes the chance to show everyone else that they are "stressed" or need "energy" yada-yada-wanh-wanh-wanh - so there also an attractive adult professional demographic.

Oh, man, what a steal at these prices. It kills me to see prices like this and not have the money to invest. A PEG of < .5! Projected 5 year growth over 50%! No debt and gross margins over 50%! Record second quarter for 2008. 25% insider ownership! Sweet bejeebs, have I entered some kind of altered reality where absolutely nothing makes sense.... Oh, yeah, that's right, I forgot I was talking about the stock market.

Hansen Natural Corp (HANS) $28.50
Develops, markets, sells & distributes alternative beverage category natural sodas, fruit juices, energy drinks, fruit juice smoothies & functional drinks, non-carbonated iced teas, lemonades, juice cocktails & children's multi-vitamin juice drinks.

Hansen Natural reported record sales and profits for the first quarter of 2008. Despite the recent slowdown in the economy, energy drink sales have shown good growth, with Hansen Natural's Monster Energy drink being no exception. Net sales for the first quarter increased 27.9 percent to $212.2 million from $165.9 million a year ago. Net income for the 2008 first quarter increased 42.6 percent to $28.8 million, compared with $20.2 million for the first quarter last year. They recently launched their Monster Energy drink in Britain, where CEO Rodney C. Sacks notes that reception there is "proceeding according to plan". Furthermore, Southwest Airlines just became the first major airline to offer an energy drink (Monster) to U.S. travelers.
Nobody can deny that although missing analysts' expectations, Hansen Natural has plenty of room for growth, and a healthy p/e ratio to match it , and now is a great time to buy, as it is trading at its 52 week low and a cheap price.

Stealing market share from Red Bull every day, and set to overtake its main rival in about three years at current rates. That would place Hansen at over $1 billion in annual sales, and way more than justify the current price.

I keep seeing parents drinking Monster at soccer games and chess matches, and students drinking them on campus (they were passing them out for free from a "Monster" truck last week - nice promotion!) The two primary arguments against this stock seem to be that energy drinks are a fad and that Coke/Pepsi will suddenly wake up and compete. Caffeine's not new - they've just found a better delivery method. Coke/Pepsi have already been trying to compete in this new market for well over a year without much success, and even if they produce a strong product I think they could wind up stealing as many of their own customers as Hansen's -- if the number of customers switching from Monster to a new Pepsi product is eclipsed by those switching away from Mountain Dew to energy drinks in general, they would only be hurting themselves.

Recent disruptions caused by transition to Bud distributor network in FL, Nor CA, metro NY (and other regions, combined representing about 1/3 of their previous dist network), will be followed by deeper and more robust sales with the much-improved distribution provided by Bud (which is in every nook and cranny of the country). Sales should continue strong through 2007 with new products and better distribution, looks like $1.12+ eps in 2006 on 50% growth, and as new dist kicks in, maybe $1.80 eps in 2007 = 50-60% growth next year. Looks like a $40+ stock by Fall 2007 with $1.50+ behind them by end June or Sept and a trailing p/e of 30x. A cash machine which doesn't give guidance (like GOOG), which I love. They just run the business and let Wall Street make the projections.

While Hansen adjusts its distribution network and product mix, the fact is that it experiences strong growth, it has not entered numerous product categories, it has reported it is taking share from Red Bull, and it will not experience the full benefit of the A/B relationship until sometime in 2Q 07. Despite the 11/9 bloodbath, the news went out on a one liner and ignored the followup on the conference call, that HANS Monster was stronger than 50% growth in 10/06 and the month was being placed against the best month of last year, and thus it should not be taken as a read on future growth, which is what the market perceived was said -- that growth had slowed more than expected. Tomorrow and the next week is about the best buy opportunity you are going to get on HANS, once the analysts sort this out.

Hansen is on fire. As of this writing, Hansen has dropped from a PE of about 65 to 35, after posting quarterly earnings growth in the 85% range. This company has several things going for it. Youth are trending away from Pepsi and Coke toward 'authentic' drinks. The folks running the Monster product line have done a tremendous marketing job associating Monster with extreme sports and have created a product that has the pricing power of Starbucks coffee without the need for expensive real estate. Recently, HANS announced a logistical distribution relationship with BUD. I believe investors hoped for some results from this partnership to boost this last quarter's numbers, but the development of the logistical change is slower than they anticipated. Right now, we have a great stock with tremendous potential, a righteous management team, held back by a reaction against overzealous investor sentiment that just got reality handed to them. This stock should come back with a bang within a year. The real question here is how large Monster can become, and whether they can retain their margins for the energy drinks. So long as pricing power stays strong and growth continues, an investment in this could easily double within two years.

Hansen, the makers of the "Monster" energy drink, is hard company to value. It is a combination of growth stock and value stock, and the strategic environment makes it necessary to factor in an abundant margin of safety before identifying a purchase price threshold. Its marginal exposure to Auction Rate Securities (ARS) and a small number of accounting changes over the last couple of years makes it necessary to read the 10K and 10Q filings more closely and marry those statements with the actual financials.

48 charts and graphs later, I decided to buy yesterday at $32.99. The analysis and reasoning are, admittedly, long-winded, but they have been posted to my personal blog, and can be viewed at:

http://rcrawford.wordpress.com/2008/06/05/hansen-natural…......

If not able to view at that URL, it can be accessed via the home page at www.rcrawford.wordpress.com

Hansen keeps on growing with growth in Monster Energy drink sales, and market share taken from Red Bull. Why settle for single digit growth in KO or PEP when you can get sustained 50% APR growth in Hansen?

The momentum of the energy drinks has made this stock still water. Even though sales are up over 100% yeah you read it right. By this time next year the stock will have doubled.

The last few months have been rough for Hansen as the stock has finally shown some weakness. I believe that since it's fall from its all time high that it is an attractive purchase all the way up to 48. It won't have the returns it did in the last 10 years, but expect it to outperform the market at these prices. Strong buy!

Great numbers! No Debt!

Distributed now by Coke and Bud.

Maybe Coke will get them into India and China.

Just opened for business in Mexico, Canada, U,K,, France, Spain,

Australia, and other European countries.

Looking for a deal in South America.

All this should start adding sales and profit gains.

Their only competition in Europe is Red Bull.

Having tasted Red Bull (reminds me of cough medicine),

I'll bet people of Europe will give Monster a try.

Monster Java is very good!

Im drinking a Monster(made by hans) as i write this. This stock has had huge gains but i still think it has some more room for growth. The competition in this sub sector is heating up, but im still buying monsters and all my freinds are to.

Nothing proprietary. Energy drinks are a fad. Lots of competition since there are over 120 energy drinks. Serious medical questions about energy drinks (kids are getting high by drinking too much of them). Momentum stocks don't bounce, they sink.