This Stock’s Seen A 100,000% Return Since 2000

As a stock, Monster Beverage (MNST) has always seemed pepped up on its own energy drinks, fueling a 100,000% return since 2000. But now with a global economic slowdown already under way, and people everywhere watching their pennies, you’ve got to wonder if it can keep its winning streak up. So I decided to give this high-octane drink maker a closer look…

How does it do across key performance metrics?

According to Warren Buffett, when a company’s gross profit margins (that’s gross profits divided by revenues, then multiplied by 100) are consistently above 40% for a lengthy period, it must possess a competitive advantage. Well, since 2016 Monster has comfortably met that threshold, keeping to the 50%-65% range (yellow line). This is the starting point for any company in achieving a healthy net profit. And it shows that Monster’s management team has been effective at keeping costs low for every dollar of revenue produced.

Historical and projected gross profit margin in percentage terms, (far-right axis; yellow line), return on equity in percent (left axis; purple line), and share price (right axis; white line). Sources: Monster and Bloomberg.

What’s more, gross profit margins look set to grow from here, with the fourth quarter set to see the full benefit of the higher prices that were introduced in September in the US. And the worst of the cost pressures appear to be behind Monster as well, with freight, fuel, and shipping container costs all falling, along with the cost of aluminum used in their cans. The currency winds have also shifted in Monster’s favor, with the weakening US dollar increasing the value of the revenue the company makes abroad.

But another key metric to assess is how good a company is at generating profit for its owners. Return on equity (that’s net income divided by shareholder equity, purple line) provides us with this information. Since 2017, Monster has returned more than 20% on owners’ equity almost every quarter – but that fell below the 20% threshold in the third quarter of 2022, as inflation drove costs to new heights. Mind you, that’s seen as likely to rebound, as the chart indicates.

Last but not least, the free cash flow margin has been a monster, hovering between 20% and 29% over the same period. When a business consistently has free cash flow margins above 10%, it is a cash flow machine. This provides Monster with a lot of flexibility: it can reinvest in its own business (potentially by developing new products). snap up other companies, or even buy back its own stock.

What’s Wall Street’s view of Monster?

Since 2000, Monster has had the highest returns of any stock in the S&P 500. So it’s no wonder that Goldman Sachs, JPMorgan, and Deutsche Bank all have an overweight or “buy” rating on it. In fact, Monster remains one of Goldman’s top stock picks. The investment bank says it's one of the most attractive growth stories, given its solid innovation pipeline and international growth opportunities. Plus, it’s delivered an above-average earnings per share compound annual growth rate of 16.6% over the past five years.

Monster isn’t a dividend payer, so if that’s a priority, this isn’t the stock for you. But in recent years, its share price gains have more than made up for that. Monster’s board also recently announced a sweetener for shareholders, with a new $500 million share-buyback program. With the $183 million still in the kitty from the June 2022 program, that leaves Monster with $683 million for buybacks. That’s chunky: it’s more than 10% of its current market capitalization (that’s total shares multiplied by share price), which definitely makes up for the fact that Monster doesn’t pay a dividend. I mean, not many stocks pay a 10% dividend yield, after all.

Additionally, Monster is currently trading at around a 28% premium to its non-alcoholic ready-to-drink peers, compared to its two-year and five-year average premiums of 38% and 39%, respectively. So there’s some chance it’ll swing higher toward those norms, in a “mean reversion”.

So, what’s its edge?

Famous investor Peter Lynch used to speak about great stocks being ten baggers. Well, Monster can do that one better, classifying as a thousand-bagger. And the company does have a lot going for it, but its relationship with Coca-Cola (KO) is particularly special.

Coke – which of course has one of the most well-established and efficient manufacturing, bottling and distribution networks in the world – bought a 16.7% stake in Monster in 2015, which gave it ownership of Monster’s non-energy products, and gave Monster Coke’s energy product portfolio and – more importantly – allowed it to leverage Coke’s incredible supply chain, 200-country distribution network, marketing, and shelf positioning. This allowed Monster to expand internationally without taking on debt. That meant it could plow that money into marketing and sponsorship tie-ups – signing deals with Tiger Woods and English premier league team Newcastle United, for example.

It’s no surprise then that Monster has established itself, alongside Red Bull, as a dominant player in this market.

Market share of energy drink companies in the US, by percentage. Source: Monster.

Are there any exciting new products in the pipeline?

Oh yes. Monster’s product pipeline looks positively thirst-quenching: it’s set to launch Monster Zero Sugar this month, and will follow that up in the first half of this year with the launch of its canned still and sparkling Monster Tour Water, and its Reign Storm fitness and performance energy drink. It’s also planning to dip into the alcoholic beverage market this year, with a state-by-state rollout of The Beast Unleashed, a line of flavored malt beverages.

Last year, Monster released True North, a line of organic flavored seltzer energy drinks similar to PepsiCo’s Celsius line aimed at health-conscious consumers, with plant-based ingredients such as ginseng, guarana, and green tea – and without calories, sugar, or artificial flavors.

No company is completely bulletproof, so what are the risks?

Let’s start with the wider macroeconomic backdrop. With a global growth slowdown already under way (and likely to worsen), consumers may need to cut back even more on nice-to-haves – and Monster’s sales could take a hit as a result. That said, it’s half the price of its bigger rival Red Bull – and that could help Monster’s sales as some consumers trade-down to the cheaper can. But in the future, Monster’s drinks could lose market share not just to Red Bull, but also to PepsiCo’s Celsius and Rockstar, as well as to newcomers like C4 and Zoa.

Of course, all these brands face the potential of increased regulation, because of the health claims made by their drinks, or increased taxation, because of the sugar content of their mainstream energy products. Although a distinctly low probability, a falling out with Coca-Cola would be a massive negative given the access it provides Monster in making and distributing products.