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Why Monster’s Trading at a Premium Valuation Compared to Peers

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Current valuation

On February 26, Monster Beverage was trading at a 12-month forward PE (price-to-earnings) ratio of  33.8x. The company’s valuation multiple has fallen 0.9% since the announcement of its 4Q15 results after financial markets closed on February 25. We discussed the company’s 4Q15 earnings in Part 1 of this series. Distribution transition, higher taxes, share dilution, and currency headwinds adversely impacted its 4Q15 performance.

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Premium valuation

Monster Beverage is currently trading at a premium valuation compared to its nonalcoholic beverage peers. As of February 26, Coca-Cola (KO), PepsiCo (PEP), and Dr Pepper Snapple (DPS) were trading at 12-month forward PEs of 22.3x, 21.0x, and 21.5x, respectively. Monster Beverage is also trading at a higher valuation multiple than the S&P 500 Consumer Staples Index and the S&P 500 Index, which were forward PEs of 20.7x and 16.2x, respectively, on February 26.

Higher growth rate expectations

Monster Beverage’s premium valuation is justified by higher sales and earnings growth expectations. Analysts expect Monster Beverage’s fiscal 2016 sales and adjusted EPS (earnings per share) to rise by 12% and 30%, respectively. The iShares Global Consumer Staples ETF (KXI) has 0.6% exposure to MNST.

Analysts expect the revenue of Coca-Cola and PepsiCo to fall 4% and 1%, respectively, in fiscal 2016. Dr Pepper Snapple’s net sales in fiscal 2016 are expected to grow 2%.

The fiscal 2016 adjusted EPS growth rate forecast for Coca-Cola, PepsiCo, and Dr Pepper Snapple is -3%, 2%, and 7%, respectively.

Growth initiatives

Monster Beverage continues to work on new flavors and packaging. Recently launched products include Pipeline Punch and Salted Caramel Java Monster. The company also continues to expand into new territories. In the 4Q15 conference call, Rodney Cyril Sacks, Monster Beverage’s chair and chief executive officer, stated that the company is pleased with the initial sales and distribution gains from the company’s December launch in Russia. The company has received preliminary approval from Chinese authorities for the Monster Energy formula and expects to launch Monster in China late in the second quarter of 2016.

For more updates, visit our Nonalcoholic Beverages page.

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