The price of Monster Beverage Corp. (MNST, Financial) recently surpassed the $100 mark. While directors on the board no doubt cheered the occasion, it also prompted them to split the company’s shares.
On March 28, shares will undergo a two-for-one split, and all investors will suddenly find themselves with the double the number of shares they owned the night before.
Not that it will make them any richer because the share price will also split in half. For example, if the price at the close of trading on March 27 is $110, then the price on March 28 will be $55.
However, it is possible the shares could end up being worth more, but certainly not guaranteed. To understand this dynamic in pricing, we need to reflect on why the board decided to split the shares in the first place.
While the energy drink developer and distributor may have some unique reason it is keeping to itself, the most likely goal is to increase liquidity. For those who are unfamiliar with the term, liquidity refers to the speed or ease with which an asset can be traded or turned into cash.
In this case, it is quicker and easier to trade $50 shares than $100 shares. Among investors who buy in lots of 100 shares, more can afford $5,000 than $10,000. Institutional investors, who trade in lots of hundreds of thousands of shares, might also appreciate a lower entry point.
Whatever the case, the board likely believes the lower price will lead to higher liquidity. And higher liquidity usually means greater demand and, in turn, greater demand should push up the price.
Over the past dozen years, Monster has split its shares twice: on Feb. 16, 2012 and Nov. 10, 2016. In both cases, the share price went up, but it could also be argued the shares were already in an uptrend. The following 15-year chart shows the previous split dates with vertical black lines (given the time period of the chart, the lines could not be placed on the exact dates, but are within a couple of days of them).
So there may be a short-term opportunity for traders, but that overlooks the greater opportunity for long-term investors.
While we have the chart still in mind, note how long-term investors have harvested steady capital gains over the past decade. The stock has been somewhat volatile at times, but keeps on rising on any multiyear basis.
Over the past decade, the price rose from $15.70 on March 8, 2013 to $103.50 today (March 9, 2023), what Peter Lynch might call a 6.6 bagger.
This graphic representation of the income statement shows its sources of income and the wide band showing net income illustrates how it earned a profit of almost 19% last year:
Over the past 10 years, its net margin has ranged from a low of 15.08% to a high of 30.65%, with a median of 23.87%. It currently sits at 18.88%.
GuruFocus reports that its net margin is better than 91.07% of the 108 companies in the non-alcoholic beverages industry.
Given the margin and the fact it does not pay a dividend, Monster has significant amounts of free cash flow to keep growing the business. That takes place through both organic growth and acquisitions. Here is a screenshot from the 10-K for 2022, showing a list of new products introduced last year alone:
The company added:
“Our ability to compete in the highly competitive beverage industry and to achieve our business growth objectives depends, in part, on our ability to develop new flavors, products and packaging. The success of our innovation, in turn, depends on our ability to identify consumer trends and cater to consumer preferences. If we are not successful in our innovation activities, our business, financial condition and results of operation could be adversely affected.”
It also pulled a few underperforming products, but they will not have a “material adverse impact on our financial position, results of operations or liquidity.”
As for its fundamentals overall, Monster receives a very high 95 out of 100 GF Score.
More specifically, it receives 10 out of 10 scores for financial strength, profitability and growth, while receiving a 6 out of 10 for valuation and momentum.
The GF Value Line gives it an intrinsic value of $109.56, which is just $6 more than the current price, and a fairly valued verdict based on historical ratios, past financial performance and analysts' future earnings projections.
Its price-earnings ratio is among the highest in the industry at 46.26, while its PEG ratio is 5.03, well above fair valuation by that measure.
Part of the reason the PEG ratio is so high is because of the high price-earnings number, and the other part reflects the slump in Ebitda in 2022 (one year in the five that go into the Ebitda average):
Over the past two years, free cash flow has also taken a dive. The company explained, “Principal uses of cash flows in 2022 were purchases of investments, purchases of treasury stock, the acquisition of CANarchy, development of our brands internationally and acquisitions of real property, property and equipment.”
Except for stock repurchases, Monster used its cash flow to reinvest in its business.
Seven gurus held positions at the end of 2022, according to 13F filings. The biggest stake, by far, was that of Jim Simons (Trades, Portfolio)' Renaissance Technologies (3,005,417 shares). The second and third largest positions were those of Ray Dalio (Trades, Portfolio)'s Bridgewater Associates (924,733 shares) and Steven Cohen (Trades, Portfolio)'s Point72 Asset Management (543,029 shares).
Institutional investors held 58.25%, while insiders owned 0.48%.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
In summary, the stock split gets the headline, but long-term investors will appreciate Monster Beverage’s robust fundamentals and its profitable growth. There may be no dividend, but the steady stream of capital gains over the past decade and more suggests a bright future.
