Can You Say, "Monster"?

Last week (Monday, April 30th) The Wall Street Journal reported a story on the wires that Coca Cola (KO, $77) was in talks to acquire Monster Beverage (MNST, $66.74). Shares of MNST shot up from about $65 to $83 as the news circulated, but before the close of trading KO said that they were not in such talks. MNST fell right back to about where it had started the trading day. A fundamental rule of investing is that we should never buy a stock on takeover speculation alone, and I will always adhere to that. This case, though, offers us some insights about what happens when a company is bought out, and we can draw some conclusions about why MNST might be a logical takeover candidate.

The first point of interest is that more than one research analyst responded to the story by saying that Monster could go out (be bought) at somewhere between $84 and $100 per share. That is not surprising, really, because when one company wants to take over another one, the acquirer has to pay the shareholders of the target company a premium price. This takeout price is typically going to be substantially higher than the target prices analysts place on stocks, because such target prices are based on the company's projected worth as a going concern, not on the price another company might pay. Also, MNST is no beaten up stock that a bigger company might opportunistically pounce on to buy it on the cheap. MNST is up some 41% year to date and up more than 100% over the past year. Even with this move in the stock and its current price-to-earnings multiple of 43, the analyst community still considers that the company is worth even more to a suitor such as Coca Cola.

Why would Coke want to buy Monster? For one thing, the traditional soft drink business is mature, and even with the potential of growth internationally, this is just not a high growth business. One part--maybe the only part--of the beverage sector that is growing impressively is the energy drink category. Remember what was going on with Diamond Foods last year, before the accounting fiasco that caused the stock to implode? The stock soared at the prospect of the Pringle's acquisition. Investors love the steadiness of the food and beverage sector (consumer staples), but it just doesn't offer tremendous growth. So, when a business combination comes along that could ignite much higher growth, investors get all excited and knock themselves out buying the stock. This is by no means a suggestion that MNST will ultimately be bought by one of the big players, but that possibility is certainly not hurting the stock price. One lesson here is that growth is worth a premium, just an even higher premium if a company is bought out. If--a big IF, now--Coke or some other company were to buy Monster for $90 per share, that would be about 58 times current earnings.

Monster Beverage was once known as Hansen Natural, a company started by Hubert Hansen in the 1930s to sell fresh, non-pasteurized juices to film studios and retailers in Southern California. The company went through several names changes, and their natural sodas have been available in health food stores such as Whole Foods Market for years (I have always liked their Black Cherry flavor). When energy drinks became such a major part of their business, they changed the name of the company to Monster Beverage. You ought to see my wife whiz through the Dollar Tree after she's knocked back a couple of cans of this stuff. I am especially fond of their Rehab drink, which combines the energy formula with two of my favorite (non-alcoholic) beverages, iced tea and lemonade.

Elsewhere in the food and beverage sector, Hain Celestial Group (HAIN, $50.27) reported great earnings last week of $.54 per share versus an estimate of $.50; their full year earnings view is now $1.76 to $1.80 per share, with the consensus at $1.73. The stock rose $2.96 Friday to close at $50.27, bucking the market sell-off. Hain is a manufacturer and marketer of  natural and organic food products, with brands including Earth's Best, Celestial Seasonings, Garden of Eatin' (love that name), and Arrowhead Mills. Here again we have a company that is thriving in a higher-growth niche of a larger sector that is showing much slower growth. The projected growth in earnings for Hain is about twice that of Kraft, for example, and Kraft is splitting into two companies to unlock value for its shareholders, with the higher-growth snack business trading as a stand-alone company. Hain's products are a mainstay on the shelves of health food stores, and we don't want to forget who owns a lot of those shelves, Whole Foods Market (WFM, $89.96). WFM reported earnings last week of $.64 per share; the estimate was $.59. They raised their full year earnings view to $2.44--$2.47 from $2.28--$2.32, and the stock responded by surging about 8%. I think that the trend of healthier eating will be in place for a long time, and it is one that I expect to thrive alongside the success of Taco Bell, Kentucky Fried Chicken, and Pizza Hut, which are all owned by Yum! Brands (YUM, $71.15). That's just another variation of our "Tale of Two Cities" economy investment thesis.

Speaking of monsters, the big monster earnings surprise of the past week was from Liquidity Services (LQDT, $64.17), which clocked in at $.52 per share, blowing away the $.37 estimate. The company raised its full year earnings view to $1.64--$$1.70 from $1.32--$1.38. The stock responded by surging 13% on Thursday and bucked the downtrend on Friday by adding another $1.93. LQDT operates online auctions for the sale of salvage and surplus inventory. They are, in effect, an eBay for the wholesale sector.

Finally, there seems to be a monster of a mess at Chesapeake Energy (CHK, $17.39), and here we have another cautionary tale of the cockroach theory of bad news. I owned CHK during part of last year, until I read the Sell recommendation from Argus Research in November. Any other shareholders who heeded that report would have been spared the 35% decline in the stock since then. The Argus report pointed to the convoluted nature of some of the company's accounting, with particular concerns about its arrangements with its Chairman and CEO. Until all of this is resolved, I have to assume that there may be more cockroaches lurking in the walls.

My advice? Drink some Monster to get your feet moving fast enough to stomp on those cockroaches.

Life is short. Get busy.

Jim

(Wikipedia was the source of the historical information about Hansen.)

Disclaimer/Disclosure: My family members and/or I own shares of MNST, HAIN, WFM, LQDT, YUM, and KO. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as a recommendation to buy or sell any security.