What's Behind Hansen's Smackdown?

by: David Kretzmann posted on: July 04, 2008 | about stocks: HANS    
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Yesterday Hansen was smacked down to $25, so I thought I'd take a look into it and see if there is good reason for the drop. The stock is at a new 52 week low and it actually hasn't been at these levels since 2006. I already own a bundle of Hansen stock, but an opportunity is an opportunity and I'm willing to increase my position if one is presented.

First, let's do a quick summary of the company's 1Q 2008 results. Net sales increased 27.9% to $212.2 million, net income increased 42.6% to $28.8 million ($0.29 per share) from $20.2 million ($0.21 per share) in 1Q 2007. The Monster brand remains strong and the new drinks in the Monster and Java Monster lines are proceeding as planned. Plans to expand the Monster line into the U.K. are going along as expected.$159.11 million in cash with no debt. One thing that isn't pleasing to see is that cash flow decreased to $25.93 million from $48.03 million in 1Q 2007. In the 10-Q, the decrease is explained a bit more:

For the three-months ended March 31, 2008, cash provided by operating activities was reduced due to a $11.6 million increase in inventories, a $3.8 million increase in prepaid expenses and other current assets, a $3.1 million decrease in accrued compensation and a $1.0 million increase in tax benefit from exercise of stock options. The increase in inventory is attributable to the addition of new copackers, the introduction of new products and planned inventory levels to meet consumer demand.

See: 1Q 2008 press release

So the decrease in cash flow generally seems to be due to increased levels of inventory no doubt to meet summer demand and because of the new drinks just released six or so months ago. So the cash flow production decrease seems to be more of a short-term happening rather than a longer-term trend. It's also important to remember that this is typically a relatively slow quarter for the cold beverage industry yet the profit margin still managed to increase. The company's efficiency is excellent and I don't see the decrease in cash flow production as anything much more than a short-term item necessary for a strong summer. Of course, any thoughts on this are appreciated. But given the strong earnings and sales growth, superb balance sheet, and increased efficiency, the cash flow decrease just doesn't add up to me as anything representing a faulty business or anything like that.

The company's energy drink sales increased roughly 32% and remains by far the largest segment of sales. The energy drink portion of the beverage market continues to be one of the stronger areas and I highly doubt it will slow down much through summer. Monster is an addictive, hip brand with a diversified line of drinks, and with the distribution agreement with Anheuser-Busch (BUD) it certainly seems to be in a strong position. Plus, expansion into Canada and the U.K. is just starting and should start to become a more prominent part of the business.

Hansen has managed to increase the profit margin in the past couple quarters (especially in the 4Q 2007) which is impressive considering the new line of drinks and the still new distribution agreements (which actually good be a big part of the reason for increased efficiency). The balance sheet remains sparkling clean and earnings and sales continue to increase at impressive rates especially considering that the 1Q typically is a weaker quarter for the company. The one question market is cash flow, but the 4Q was such a strong quarter for cash flow production that I simply do not believe the drop off in the 1Q is much more than a short-term happening or a necessary evil to gear up for the summer.

In short, this is the way I see it. Nothing at all has dramatically changed with the business. The financials remain very strong, the new products are being well received, international expansion is just getting started, and nothing has changed with the company's long-term picture.

I look at it this way. From today's EPS of $1.60, let's assume that earnings grow at 25% annually for the next two years. This would put the EPS at $2.50 in mid-2010. This is more or less what analysts expect (analysts are expecting the EPS to be at $2.34 in fiscal 2009). Now let's assume that the market prices the stock with a P/E of 16, around today's range. Keep in mind that this is the P/E after the stock has been hammered on no news whatsoever. In any case, this would put the stock at $40, which would equal a 25% annual return over the next two years. These are extremely conservative projections in my opinion, for the next couple years I believe Hansen could easily increase earnings at 30%-35% annually. Most of the company's growth is coming from inside the U.S. on a still new distribution deal with Anheuser-Busch. Internationally there is a great deal of potential for the company and domestically there certainly isn't a shortage of potential with the new Java Monster line.

In the past couple of years, Hansen has typically bottomed out sometime in July. I'm very tempted to add to my position soon because there is no substance at all for the huge drop recently and today. As I write this the P/E is 15.83. This is the lowest P/E the stock has traded at since late 2003. I am not kidding, folks. Look at the company's YOY growth since the 2Q 2007:


Quarter              Earnings growth [YOY]       Profit Margin 
------------------------------------------------------------------- 
2Q 2007                    35.9%                    15.65%
3Q 2007                    73.1%                    18.53%
4Q 2007                   103.1%                    18.29%
1Q 2007                    42.6%                    13.58%


This amazing growth in a sluggish economy, and you give the company a P/E of 16? This is not right. Looks like Hansen will be a larger percentage of my portfolio soon.

Disclosure: Author holds a long position in HANS

This article has 17 comments! Add yours below...

David Kretzmann

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This article has 17 comments:

  •  
    thecondoguy1
    Jul 04 11:00 AM
    David, as usual good job on your essay, I agree there is a lot of upside to this stock, lets hope the update on 7/8 is as positive as your thesis, again good job......................
  •  
    blah-blah
    Jul 04 01:56 PM
    That's some ugly downtrend.

    I wouldn't feel comfortable long term averaging down on this without some kind of dividend or a positive divergence on the techncals showing it's about to bottom.
  •  
    Fellow Fool
    Jul 04 02:33 PM
    David, I was reading this article without having looked at its authorship. I was thinking that the author seemed rather Foolish and that a very smart gentleman over at The Fool SA Investing Lounge had a very similiar take. I got a nice laugh when I noticed that the author and the "very smart gentleman" were the same person. : )
    Fool on,
    Ken
  •  
    The Thinker
    Jul 04 02:35 PM
    Both Rockstar and Monster contain more caffeine than the traditional Red Bull, and there is a growing concern about the side effects that these newer energy drinks are having on teenagers, ie. nausea, abnormal heart rhythms, etc.

    See NY Times article, "Taste for Quick Boost Tied to Taste for Risk".

    www.nytimes.com/2008/0...
  •  
    thecondoguy1
    Jul 04 07:30 PM
    What is a "thinker" doing reading the new york times, (caps deleted deliberatly).
  •  
    RMG
    Jul 04 08:21 PM
    As it often happens, the real reason will be made known only after the knowledgeable few have dumped their holdings and / or completed their slow and steady short selling. The short interest is now around 30% of the outstanding and has been steadily increasing since November of 2007. It has accelerated last month (June).
  •  
    borisb
    Jul 04 09:16 PM
    European energy drink market hit saturation a few years ago and a US slowdown is overdue.
  •  
    David
    Kretzmann
    Jul 05 12:22 AM
    My Website
    A further U.S. slowdown is certainly possible, but I'd suggest reading this article:

    www.pe.com/business/lo...

    The beverage industry has typically done relatively well in recessionary times, and given energy drinks' popularity (especially Monster) I'd say Hansen would be somewhat steady if a further slowdown were to occur. And if/when the company's international popularity rises, it should offset the downside presented here in the U.S. Plus, Monster hasn't nearly saturated all its possible markets and still has a ways to go to as far as market share compared to Red Bull.
  •  
    Commodore
    Vladov
    Jul 05 01:16 PM
    In 1992 I was in night club in Bulgaria,Red Bull came to promote to us(They just started).Nobody liked it.It was named Red because it used be whit red color and tasted different.Energy drink is same as ANY DRINK WHIT Caffeine(COFFEE). Get out and go to ESSPRESSO BAR
  •  
    Commodore
    Vladov
    Jul 05 01:22 PM
    borisb is right
  •  
    Daniel
    Jacome
    Jul 05 02:15 PM
    My Website
    good artilce, problem is Street is scared of fad stocks right now after CROX, JSDA, and HLYS blew up
  •  
    Greg Weston
    Jul 05 04:13 PM
    My Website
    I like my coffee cold, especially in the summer. I tried the Java Monster drink, several different flavors actually. However, Starbucks is now selling the same thing (cold coffee in a big can with ginsing added), plus a few other brands.

    I don't like the taste of any of them, and have gone back to drinking either brewed black coffee over ice, or if I am in a rush the glass bottles or little "double-shot"... cans of Starbucks.

    All of the "big can" coffee drinks have a strange taste to them, which I assume is the ginsing. Plus they are more expensive. To the extent that people want stronger coffee, 7-11 has for free "stok" packages that you can add to fresh coffee, which goes for $1.79 rather than the $3 of the big cans.

    Something also to be worried about is state and/or federal regulation. What happens to revenue if sales to minors is banned?
  •  
    Greg Weston
    Jul 05 04:23 PM
    My Website
    Another reason I wouldn't want to own the stock is the risk that Coke/Pepsi/7-up/Starbu... will offer retailers deals to exclude these competitors and only stock their brands of energy drinks. They don't have to be too explicit, they could just be "we'll give you a discount on Pepsi and Mountain Dew bottles if you meet sales goals for Mountain Dew Amp." Next thing you know, Amp gets placed in the best location of the store, while Monster gets kicked out of the fridge and is only sold warm.

    I'm not short. I considered shorting when Herb Greenberg starting writing about them, but decided I didn't want to fight a stock with a strong up-trend. As has happened so many times, Greenberg was right!
  •  
    Commodore
    Vladov
    Jul 05 05:27 PM
    My target price is $8
  •  
    VanceHammers
    ly
    Jul 05 07:53 PM
    Try www.nasdaqtrader.com/T... and they've been there since 6/18. Hitting the bid with 6 to 7 million non-existent shares tends to have a downward pressure on price. BTW Herbie Greenberg is a tool and I'm glad Marketwatch finally dumped him.
  •  
    theinvesting
    speculator
    Jul 05 09:13 PM
    My Website
    Competion is beating on it's door. Input cost are rising. We are going to see if they have any pricing power.
  •  
    LarsBod
    Jul 06 04:23 PM
    The European penetration will be a short jab - but
    the market up here is quite saturated - if Europeans want
    stimulatory agents , use of coffee and especially ice tead are growing,the increasing medical evidence that white and green
    teas are clinically proven to almost being a panacea for
    good health are growing by leaps and bounds.
    Buy stocks in the inventive large green TEA producers -
    Like Hansen in the 90"s...

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