Tuesday, October 7, 2014

* Monster (MNST) - Incomparable Growth & Risk to Coca-Cola Yields a $2 Billion 'Partnership'

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MNST is trading $92.62, up 0.3% with IV30™ up 3.5%. The Symbol Summary is included below.

Provided by Livevol

In the Soft Drink Industry, there is no other firm like MNST when it comes to growth.  That hasn't gone unnoticed by the king of king's, Coca-Cola.  Not only did KO make a massive investment, they also put a death kill into MNST's non energy drink business.  Shh.. it's the secret no one wants to talk about... KO is scared, and they should be.

But it also reveals one other point: MNST revenue (in totality) is tiny compared to the giants ($2.5B for MNST vs. ~$50B for KO).  The industry as a whole is suffocating for growth.

MNST stock popped 45% in a week's period in early August on this news:
Coca-Cola (NYSE:KO) agreed to pay Monster (NASDAQ:MNST) $2.15 billion in cash for a 17% stake in the company. Coke will also transfer its energy-drink division to Monster, while Monster agreed to transfer its nonenergy drinks to Coke and put two Coca-Cola appointees on its board.

Source: InvestorsBusinessDaily - Will Coca-Cola Deal Continue To Energize Monster Beverage?


We'll examine the fundamental measures of MNST that make it so remarkable, and then look at risk pricing in the option market. First, let's start with the chart of all charts: The x-axis plots one-year revenue growth, the y-axis plots one-year earnings growth.

We can see rather easily... In terms of growth, there's MNST... and then there's everybody else.

Before we turn to more financial measures, let's just peek at the stock return chart.

Provided by Livevol

In the last year, MNST is up 65%, but the lion's share of that move came off of the most recent earnings release and the KO deal.  Boom goes MNST.

Now... why would KO invest in MNST (and eliminate MNST's footprint in the non energy realm).

Total Revenue (TTM)
The revenue growth has been cartoonish, rising from under $100M to now over $2.3B in the trailing-twelve-months.  And... by the looks of the chart, it doesn't look like there's any slowing down.

As a point of comparison, here is the time series of revenue (ttm) for Coca-Cola (KO).  Note the flat to declining revenue. KO needs to find growth.

Gross Margin %
Here's a chart where steady and stable is great news.  As MNST has exploded in revenue, gross margin % has remained quite high, surpassing the 50% level.  For a point of comparison, KO also has steady gross margin %, but its as high as 61% (whoa).

Net Income (TTM)
Steady (and high) gross margin % with exploding revenue usually means one thing: growing profits. We can see MNST has gone from essentially a break-even firm to one that has generated over $400M in net income over the last year.

As a point of comparison, KO has net income (ttm) of $9B for 2012 and today sits at $8.4B.  KO needs the growth...

Finally, a repeat of the first chart.  There's MNST, and then there's everybody else (in terms of growth).

Now we can look to the option market and risk.  Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The bottom line, risk has been collapsing in MNST as it defines itself as a firm with very steady operations and very dependable growth.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$84.50, $101.50] by the end of trading on Nov 21st (with an earnings cycle embedded in that expiry).

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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