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Hey David,

Wondering what your thoughts are to this analysis:

With Hansen Natural's stock down about 44% from its highs a few months back, the stock would appear to be cheap. So if you're the management team at Coke and you've been thinking about buying Hansen, now would seem like a good time to pull the trigger on a deal. Obvious... right?

Well maybe not. Hansen's Monster line of energy drinks is the jewel in the company's product portfolio and there are reasons for concern. First, margins are suspect as Monster might not be able to sustain its pricing advantage in the face of ever increasing competition. Then there's lackluster performance of its coffee energy drinks. Java Monster has been anything but a monster and with the costs of coffee and dairy products rising rapidly margins are almost sure to be squeezed in the quarters to come. Toss in management's decision to expand the coffee-type offerings and it's not hard to see growth slowing down the road.

That's not to say that Hansen won't enjoy a decent year. Bolstered by new distribution deals with Anheuser-Busch and Pepsico of Canada, analysts still see earnings growing by 40% in 2008 with a 32% jump in sales. Then again, Hansen hasn't been very good at meeting its targets in recent quarters and nothing sends a stock down faster than underperforming expectations. With margins at risk, another profit miss is not only possible but probable.

Could Coke come in and save the day? It's possible but it's also very possible that the rumor of a takeover will persist for another year or more. Hansen is at its lows for a reason. There's trouble brewing behind the headlines and the apparently cheap valuations. If I'm Coke's management team, I'm waiting to buy Hansen until the company is cheaper still -- like below $30 per share.
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No. of Recommendations: 3
Hi SlothropsMonkey,

In all honesty, I don't think the author understands Hansen that well.

First, he questions whether or not Monster can sustain current prices due to increasing competition. The fact is that Monster costs nearly half of what Red Bull (the market leader) does, and Monster's market share has been skyrocketing recently. When you realize that management is really putting a lot of R&D-type funds into expanding the Monster brand name, Monster should be the number one energy drink brand within the next 2-3 years.

I don't know why the author says Java Monster "has been anything but a monster". The Java Monsters have gotten very good reviews and have been received quite well by the market. Distribution is still in relatively early stages, so the product still hasn't really reached its full potential. I mean, it is less than a year old and the author seems to think that it should be a huge contributor to revenue already. This is a quote from the 3Q 2007 press release from Chairman and CEO Rodney Sacks:

"The energy category continues to show strong growth over the prior year, and the Monster Energy(R) brand continued to increase its market share. In particular, sales of our Java Monster(TM) line of non-carbonated dairy based coffee drinks have exceeded our expectations," Sacks said.

As for Hansen missing analyst targets, this has been due to one-time expenses related to the stock option investigation from last year. Had you taken out those expenses, Hansen would have either met or beat the consensus estimate.

So, don't listen to a word in this article. The author clearly has not done much digging on his own through the SEC filings and doesn't realize just how much Hansen is expanding and strengthening the Monster brand name. The new distribution deals will be coming into full play this year which will really boost the brand and sales as well. The balance sheet is incredibly strong and will fuel continued product development and expansion.

If Coke is indeed interested in buying Hansen, I hope management is smart enough to turn down an offer. Unless the offer was upward of $90/share I wouldn't even consider saying yes. I think Sacks realizes the strength of Hansen and the huge opportunity the company has both domestically and internationally.

The bottom line: I remain extremely confident in Hansen's future. Experienced management, super financials, the company is expanding what is one of the strongest brands in the beverage industry right now, and the new distribution deals will only strengthen the company's position.

Can you tell that I'm bullish? ;-)

Best,

David K
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No. of Recommendations: 2
Right there with you on this one Dave....

Java Monster is entering a sector of the market that is dominated by Starbucks products at this time. So a steady growth trajectory in this area is healthy in my opinion. In fact, the company is so pleased with the Java market right now, they are introducing multiple other flavors. They would not be attempting this if the margins were"suspect" and the sales were well below expectations. It is unreasonable to think that this company continue to pursue a product that is as weak as suggested by the statement concerning disappointing Java sales.

As for Pricing power, I have bee watching the Monster products increase in price from $2.00 this summer to $2.50 this winter. That is pretty good pricing power if you ask me. The distribution deals are solid growth contributors, without the company having to do much of anything, except produce more product. So increase in operating costs would be expected. Remember also, that if this company continues to grow, growth rates will have to slow. So, 73% earnings growth in the last quarter and they disappoint analysts. Let me tell you, come through with 73% growth this quarter and disappoint me some more. And then disappoint me again in the next quarter.

I am certain that a vote would have to occur if Coke made a friendly offer, the only concern I would have would be a hostile take over attempt at subpar value. This stock was near $70.00 just a bit ago, and only dropped after announcing 70% earnings growth. Talk about the madness of Mr. Market. 90-100 would be fair value for this company's growth potential moving forward, and I wonder if AB wouldn't get involved if they thought they would lose their distribution deal to Coke with any purchase.

Zero debt, cash cow, increasing market share, increase shelf space, increased international expansion, increased product line, and this company still doesn't advertise, except through extreme sports sponsorship...

Disappoint me again this quarter, please disappoint me again.....

Psycho
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Thank you David for your thoughtful and in-depth answer. Now try as I might, I can't find any dates for the next HANS earnings announcement, though my brokerage claims it is to take place during the week of Feb. 4th. Does anyone have more specifics?
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Hi SM,

I don't think Hansen has released an official release date and time, although www.earnings.com says the conference call will be on February 27:

http://www.earnings.com/company.asp?client=cb&ticker=hans

It'd be great if they reported before I head off to Mexico for a couple weeks, but it doesn't look like it's going to be that way.

Best,

David K
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I too was expecting them to report on the 4th, but Etrade is now showing Feb. 15 as the earnings announcement date. I checked the Hansen's website and saw nothing in the way of announcements this morning. I don't know that they have released anything to the press yet, but I am watching...
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Ameritrade says:

HANS is expected to announce 4th quarter earnings the week of February 15, 2008.


DS
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regarding pricing for Monster -- I noticed Costco recently raised the price about 9% to 29.99/case. Since they tend to operate with a fixed margin formula (unlike grocery or convenience stores) for their items, I assume this reflects a similar increase in their supply cost. In any case, didn't stop me from buying it.

Dave
(long COST & HANS)
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author high-lights 20 trading ideas, one of which is HANS @ 6+ min:

http://www.shadowtrader.net/videos/sunday021708st.html
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