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Is Monster Beverage a Value Investment?

Warren Buffett famously built part of his fortune by investing in companies that made the beverage he loved to guzzle: soda pop. At different times Berkshire Hathaway (NYSE: BRK.H) invested heavily in PepsiCo Inc. (NYSE: PEP) and the Coca-Cola Co. (NYSE: KO).

Buffett’s thinking was that people always want something sweet to drink; particularly something sweet and loaded with caffeine that’s cheap. The numbers certainly justify Uncle Warren’s investments; PepsiCo reached a gross profit of $34.590 billion and a net income of $6.329 billion for 2016. Coca-Cola reported a gross profit of $25.398 billion and a net income of $6.527 billion for 2016.

Those figures are impressive because they were achieved at a time when sales of carbonated soft drinks are tumbling. The total volume of soft drink sales fell by .8% in 2016 and 1.2% in 2015, Beverage Digest reported. Sales of some brands collapsed faster Diet Pepsi sales fell by 9.2% and Diet Coke sales fell by 4.3% in 2016.

The potential profits here are huge because the global energy drink market is forecast to reach $61 billion by 2021, CNN reported. That growth is fast, the worldwide energy drink market was estimated at $39 billion in 2013.

Does Monster Beverage Make Money?

Coke and Pepsi’s cash will have many younger value investors wondering about their generations’ jolt of choice: energy drinks.

After all, many Generation X and Millennial professionals guzzle energy drinks by the case, and Generation Z seems as addicted to them as video games. More importantly, consumption of energy drinks is forecast to more than double by 2021 making energy drinks a growing source of revenue in a changing industry.

Such investors will wonder if the highest profile energy-drink producer Monster Beverage Corporation (NASDAQ: MNST) is making money. Monster reported a gross profit of $1.942 million and a net income of $712.69 million in 2016. That is minuscule when compared to Coke and Pepsi but growing.

Monster’s revenues grew by 12% in 2016, and 15.42% during 3rd quarter 2017, Stockrow data indicates. The company’s business is expanding fast despite numerous media scare stories about the dangers of energy drinks.

What’s more impressive is Monster’s share price which went from $43.32 on 19 January 2017 to $68.45on January 23, 2018. Monster is certainly a very good small-cap growth stock but it is not a value investment yet.

Monster Beverage is not a Value Investment

Monster Beverage is not a value investment because its cash is limited. It had an operating cash flow of just $256.84 million and a free cash flow of just $229.70 million for 3rd quarter 2017.

The value was also limited, with just $1.095 million in cash and short-term investments and assets of just $4.709 million on September 30, 2017. That makes Monster a good small-cap growth stock, but not a value investment.

Coke and Pepsi are still the value investments in the sweetened beverage sector. Coca-Cola reported cash and short-term investments of $27.357 billion and assets of $90.515 billion on 29 September 2017. PepsiCo reported cash and short-term investments of $18.278 billion and assets of $78.463 billion on the same day.

Coke and Pepsi are Great Dividend Stocks

Despite its’ popularity, Monster Energy is not even in Coke and Pepsi’s league and will not be anytime soon. It does not even offer a dividend like Coke and Pepsi do.

Coca-Cola paid a dividend of 37¢ on November 30, 2017. It also paid a  dividend of 36¢ every quarter in 2017. Each Coca-Cola stockholder received $1.48 a share in dividends in 2017.

Pepsi is even better it paid an 80.5¢ dividend on 17 November 2017. More importantly, Pepsi paid out every quarter in 2017 and that dividend increased from 75.25¢ on March 1, 2017. Pepsi shareholders received $3.1675 in dividends in 2017.

This makes Coke and Pepsi far better stocks for a long-term portfolio than Monster Energy. Monster will grow but it is not making that much money and its growth prospects are limited.

A problem Monster faces is that Coke and Pepsi are investing in its competitors such as Suja Juice. Coke invested $90 million in Suja Juice; which makes healthy alternatives to energy drinks such as Kombuchas, Probiotic Waters, and smoothies from cold-pressed juice in 2015. Forbes reported that Suja sold 40 million bottles of its juice products in 2015.

Coke and Pepsi’s “Eyeball Space” Advantage

Such investments make Coke and Pepsi the real value investments in energy drinks because they have the cash to buy up smaller competitors and dominate the industry. The two cola giants have other attributes that make it easy to leverage such acquisitions.

They also have the capacity to launch new products sales of a product called Coke Zero increased by 3.5% in 2016 while Diet Coke consumption declined, Business Insider reported. The ability to launch products like Coke Zero; and its replacement Coke Zero Sugar, shows that Coke still has what it takes to make money in beverages. This is demonstrated by Coca-Cola’s North American sales which increased by 3% during 3rd Quarter 2017.

A major advantage that Coke and Pepsi have is shelf-space at retail giants like Kroger (NYSE: KR) and Walmart (NYSE: WMT) and a presence in vending machines. Since almost all beverages are marketed through such channels that gives them a sort of toll booth to the industry.

Coke and Pepsi have the ability to put products where thirsty customers can see and grab them. This “eyeball space” gives them a marketing edge; small players like Monster cannot match. Examples of eyeball space include convenience stores and soda fountains in cafeterias and fast food joints.

Coke and Pepsi’s Toll Booth

Buffett loves to invest in “toll-booth companies;” such as Coke and Pepsi, that control the gateway to an industry. A gateway company does not have to worry about next-generation competitors; because it can simply charge them a toll, if they want to sell through its market channels.

If companies like Suja and Baqua want to get big they will have to pay Coke and Pepsi to get access to shelf space and vending machines. That means value investors like Buffett make money no matter what the fashionable beverage of the hour happens to be.

Coke and Pepsi are still the value investments in canned beverages and will be for a long time to come. Investors seeking income would be well-served by either stock.