Hansen Natural in many ways epitomizes the strong growth in the alternative beverage segment, boasting an impressive 40 percent annual growth rate over the last five years. During the 13 weeks through January 24, 2009, Neilsen reports that at all convenience, grocery, drug and mass outlets (excluding Wal-Mart), Monster grew by approximately 14 percent while the energy drink segment grew by 8 percent. This outperformance continued through May of this year with industry sales declining 4.6 percent while HANS grew 0.2 percent.
Apart from the growth in the US market, HANS has several opportunities for growth in the European and Australian markets. It has signed Valentino Rossi, the World Champion MotoGP racer, as its brand ambassador. Rossi might not be a household name in US, but he is immensely popular in the Europe and Australia. This association with Rossi offers great potential in my opinion. Continuing its strategy of using motor sports for marketing purposes, HANS also sponsors Motocross teams in Europe which has helped in creating brand awareness in those markets.
The stock has been trending lower for the last few months falling from a high of $44 a share to its current price of $29 a share. It has significantly lagged the performance of the S&P00 index during this period and I view these price levels as an attractive opportunity to accumulate these shares for the long term.
HANS has an immaculate balance sheet with zero debt. Like most of my other stock selections, HANS has historically maintained strong financials and these are shown below:
* Market Cap = $2.6 Billion
* Sales = $1066 Million
* EPS = $1.23
* Net Profit Margin = 11.3%
* Debt to Equity ratio = 0.00
* Return on Equity = 25.8%
* Current Ratio = 4.89
Valuation:
Current and Projected Earnings
TTM EPS = $1.23
TTM P/E = 23.6
2009 EPS average analyst estimate = $2.26
My 2009 EPS estimate = $2.21
Fair value calculation was performed using relative valuation and discounted cash flow analysis. Relative valuation for HANS was performed by comparing HANS to its peer group and the S&P500 index. The results are presented in the table that follows. It should be noted that the data from the last four financial years was taken in calculating the averages shown in the table.
Valuation
| | Hansen Natural | ||
| Existing | Average | Fair Value | |
| P/E | 23.6 | 31.6 | $39 |
| (P/E) / (P/E – Peers) | 1.19 | 1.51 | $37 |
| (P/E) / (P/E – S&P 500) | 1.26 | 1.54 | $36 |
Based on a PEG analysis, assuming a long term growth rate of 12 percent, the fair value for HANS is $33 a share. Finally, my DCF model, assuming a discount rate of 12%, indicates a fair value of approximately $32 a share.
The Call:
I am initiating coverage of Hansen Natural with a BUY rating and a 12-month price target of $40 a share by applying a P/E of 18 to my 2009 EPS estimate. At these levels HANS would be trading at a significant discount to its historic multiples, but on par with the S&P 500 index.
Disclosure: The author did not have a position in HANS at the time of posting. He will buy shares of Hansen Natural for his personal account three days after this article is posted.
