2/25/2008

There is a monster behind Hansen Natural Corp.'s success

Monster Energy drink, that is, which helped make the beverage company the 10-year best performer among 1,000 companies in the Shareholder Scoreboard for the second year in a row. The stock had a compound average annual return of 69.5% for the 10 years ended Dec. 31, 2007.

An investment of $1,000 in Hansen stock at the end of 1997 would have been worth a whopping $195,489 a decade later, compared with $1,776 for a similar investment in the Standard & Poor's 500-stock index.

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Over the past decade, Hansen has reported steady double-digit annual revenue gains. Although the company also sells juices, smoothies, drink mixes and other beverages, energy drinks now account for about 80% of its profit. And since it introduced the Monster line of energy products in 2002, promising to deliver "twice the buzz" of a regular energy drink, the company has created almost a half-dozen more flavors. A coffee product called Java Monster was introduced last May and has been well-received.

Hansen also ranks as the best five-year performer in this year's Scoreboard, with a compound average annual return of 142.5%. A $1,000 investment at the end of 2002 would have been worth $83,941, compared with $1,829 for the S&P 500.

"This company has had a nice history of success with innovation," says Mark Astrachan, an analyst at the Stifel Nicolaus unit of Stifel Financial Corp., who rates the company a buy. "If you're expanding your product, it gets more people interested in it."

Headquarters: Corona, Calif.
CEO: Rodney C. Sacks, since 1990
Market Cap: $4.10 billion
Revenue: $605.8 million*
Net Income: $97.9 million*
*Year ended Dec. 31, 2006; 2007 results haven't been released

Monster found a niche by marketing to sports fans in their teens and twenties. Market leader Red Bull GmbH found success by targeting the night-club scene. Other competitors took a broader approach, which Mr. Astrachan says stalled their growth. Monster rapidly gained market share among young consumers with a 16-ounce can that was perceived to be a better value than an eight-ounce can of Red Bull.

Hansen has come a long way from its origins as a fruit-juice company in the 1930s, when Hubert Hansen and his three sons sold their beverages to film-studio retailers in Los Angeles. Last year, it struck a distribution deal with Anheuser-Busch Cos., allowing Monster to become available in more areas in the U.S. Most of Monster's recent volume growth has been in convenience stores and gas stations -- 55% growth last year, compared with 30% growth in grocery stores -- says Alton Stump a beverage analyst at Longbow Research in Cleveland. He ranks the stock a top buy.

The company also announced plans to take Monster overseas, starting with the U.K. this year.

But at least one analyst predicts slower growth for energy drinks. The booming energy-drink market may be reaching the saturation point, says John Sicher, editor and publisher of Beverage Digest, an industry publication and data service. Preliminary data show 30% volume growth last year, a modest slowdown from 2006. He expects slightly slower growth again this year as consumers become more interested in vitamin-enriched beverages.

Mr. Stump predicts that over the next seven years, the growth rate in the U.S. will be comparable to the current 15% growth rate in Europe, where energy drinks were introduced about a decade earlier. Still, he estimates year-over-year volume growth of 20% for Monster drinks in 2008.

After rising about 32% in 2007, Hansen's stock is down 1.1% so far this year, still better than the overall stock market.

Meanwhile, Hansen raised Monster prices 6% in January. Analysts say customers likely will accept the higher prices because many other energy drinks already have gone up in price over the past two years.