When buying high-growth companies, asset-light models are the way to go. Businesses that do not require significant additional assets to grow sales are always better businesses than those that require heavy capital expenditures, all else equal.
Monster Beverage Corp (NASDAQ:MNST) is a terrific example of a high-growth, asset-light business. Monster’s product is its brand. It spends a lot on marketing and promotion of its brand, but does not require a proportional growth in assets to meet increased sales demand. This enables it to earn an enormous return on assets.
If there were one part of Monster’s business that could be capital intensive, it would be distribution. Proper distribution of the product requires a capital-intensive build-out of a vast distribution network.
But instead of building out the network itself, Monster outsources the distribution to companies like Coca-Cola Enterprises Inc (NYSE:KO). This enables the company to save on capital expenditures, which it can then spend on advertising.
Bright Future
Monster Beverage Corp (NASDAQ:MNST) has a bright future ahead of it. It sells more energy drinks in domestic convenience stores than any other company, including Red Bull. In addition, it is second in global market share, with a 37% share of the global market compared to Red Bull’s 42% share.
Although the U.S. market is becoming saturated, Monster has a long runway for growth overseas. If the company can replicate its success in the U.S. overseas, then revenues could easily double by 2016.
With a bright future that includes continued market leadership in the U.S. and strong international growth prospects, Monster is set to become a global powerhouse in energy drinks.
Competition From Big Money
The road to global dominance will not be easy. In addition to Red Bull, Monster Beverage Corp (NASDAQ:MNST) faces competition from the likes of PepsiCo, Inc. (NYSE:PEP) and Coca-Cola Enterprises Inc (NYSE:CCE).
PepsiCo owns the AMP energy drink brand and is launching Kickstart, a new morning energy drink. The company has deep pockets and a steady stream of cash flows thanks to its Frito-Lay division, the world’s largest snack food company by revenues and a resilient business even during deep recessions.
PepsiCo’s diversification allows it to spend heavily on introducing new products without having to worry about a cyclical downturn affecting cash flows. This is a tremendous advantage to have in an industry where marketing spend is crucial to success.
While PepsiCo has enjoyed a high degree of success in launching energy drinks, Coca-Cola has been a miserable failure in the U.S. market. Its business is centered around carbonated soft drinks, where it remains the number one company in the world.
However, Coca-Cola’s attempts to break into the energy drink market have been unsuccessful thus far. As domestic cola consumption enters a secular decline, Coca-Cola Enterprises Inc (NYSE:CCE) is in desperate need of diversifying away from its cola line. As a result, Monster Beverage may be a good acquisition target if it ever gets cheap enough.
How Cheap?
Monster Beverage Corp (NASDAQ:MNST) currently trades at 15x EV/EBITDA, 25x earnings, and 36x free cash flow. These are rich multiples, but it’s difficult to determine just how cheap or expensive the company is based on those figures.
Instead, take a look at normalized pre-tax earnings. I believe the company will earn $840 million before tax in a normal year by 2016. The company currently trades at about 10x that figure. If you believe that Monster can continue growing at a high rate beyond 2016, then it may be a good pick-up at $50 per share.
However, I’m going to stick with Coca-Cola Enterprises Inc (NYSE:CCE) and wait for it to get a little cheaper before diving in.
The article Beverage Company Is in Prime Position originally appeared on Fool.com and is written by Ted Cooper.
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