Hansen Natural (HANS), makers of the Monster energy drink, had enjoyed a pretty good run as shares began the year in the low $30’s and reached a high point in early May in the mid $40’s. However, that fairly steady rise has come crashing down in the past month with HANS shares trading down about 25% from its highs; for comparison sake, the S&P 500 has gained about 4% in that time. The shares are trading down about 10% today, after an analyst at Stifel Nicholaus further reduced his earnings estimates. So, what caused this abrupt change in direction for the stock and is this now an opportunity to get into Hansen at much lower levels?
First, the reason for the decline is reports that the sales growth that had piqued investor’s interest seems to have dried up recently. According to the research note from Stifel the year over year sales totals for May might in fact be negative, which would be a major hiccup. In comparison, sales in April were 12% better than the year prior, which is certainly a nice rate of growth for a tough consumer spending environment. However, even the growth in April does not meet the outstanding sales growth over the past few years, Hansen’s sales grew by about 73% annually in 2006 and 49% in 2007. Since then the rapid sales growth rates have slowed to the low double digits. If there are concerns that sales growth is going to slow further, as Stifel is suggesting, then it would be very difficult to justify the rich P/E multiple that Hansen claimed coming into the trading day. Utilizing trailing twelve month earnings, the P/E ratio was approaching 30x, based on FY2008 earnings the valuation is even richer at 33.
The significant growth premium that these share had attracted was a primary reason that the shares have fallen so quickly as growth has apparently slowed. However, to be fair HANS did hit a home run with its most recent quarterly earnings release. The sales growth was better than expected 15.1% as Monster continued to gain market share, which lead to a significant earnings beat versus consensus estimates. Prior to today, 3 analysts have raised their estimates for the stock, but this one bearish note is making the biggest headlines and moving the market on Hansen. So, this comes down to whether you believe that the market is overreacting to one bearish analyst, who still predicts that the company will earn $2.18 cents for the year which is much better than last year’s results.
Ockham’s current valuation is Fairly Valued based largely on historical norms of price-to-cash earnings and price-to-sales. Hansen Natural shares are slightly below what we would expect to see them trade given the current fundamentals. However, it is also clear that the stock has received a significant growth premium and if that growth is stalling, we could see shares fall as low as the mid-$20. That being said, if this response to management’s comments at the shareholder meeting are just a bump in the road and growth continues, this is an opportunity to grab HANS shares relatively cheaply. The company has a strong balance sheet with lots of cash and zero long term debt, which is always comforting to investors.