McIntire Investment Institute

McIntire Investment Institute
September 13, 2005
Potential Short Investment:
Hansen Natural Corporation
Presentation By: James Crenshaw
Background Information
Incorporated in 1990
Based in Corona, California
The company’s business primarily consists
of the marketing, sale, and distribution of
beverages.
Distributed throughout the United States
and Canada.
Thesis Points:
1.) Hansen is overvalued, sales will slow.
2.) The energy drink market is oversaturated.
3.) Investors pumped Hansen up because they
wanted a pure play on the energy drink market,
which they could not get from Red Bull which is
a privately owned company.
4.) No control over distribution and production of
product.
5.) Monster Energy is a trend exclusive to
California.
6.) Limited Float
Key Statistics
Market Cap: $1 billion
Current Price: $47.42
P/E (Trailing 12 months): 32x
YTD: 170%
Industry P/E: 22x
2 years ago the company traded at $3
Outstanding Shares: 22 million
28% owned by insiders
16 million float
2.4 million shares short
81% of float owned by mutual funds or institutional
holders
Chart – 1 year
Product Information
Juices &
Non Carbonated
Hansen
Energy
Sodas
Monster Energy
Specialty &
Nutrition
Lost Energy
Sales Demographics
70% of sales from energy drinks
40% from Monster Energy
32% from California
Target alternative crowds and board sports,
advertise a lot with the Warp Tour.
Any change in the California market could be
detrimental to the companies financial health.
Competitors
Red Bull
Coke: Full Throttle, KMX
Distributes: Rockstar
Pepsi: Starbucks Doubleshot, Amp, SoBe
Adrenaline Rush, SoBe No Fear
Just to give you an example of how
saturated the energy drink market is take
a look at this next slide.
Market Share
Red Bull
Monster
Rockstar (Coke)
SoBe Adrenaline Rush
(Pepsi)
Full Throttle (Coke)
Amp (Pepsi)
SoBe No Fear (Pepsi)
Lost
Rip It
Hansens
Market Share
(%)
Change in Market Share
in the past year (%)
50.9
10.8
11.0
4.9
-9.1
4.4
1.8
-0.7
5.4
4.5
5.1
0.7
0.8
0.3
5.4
-0.8
1.0
0.0
0.7
-0.9
Distribution
Hansen does not have manufacturing or
distribution capabilities.
This leaves them no control over production &
distribution.
All of this is done through thirdthird-party
agreements
Cadbury Schweppes who owns Dr.
Pepper/Seven--Up Bottling Group
Pepper/Seven
Cadbury Schweppes Distribution
Center: Richmond, VA
Spoke with General Manager
Just signed contract with Hansen two
months ago
So far the Monster has been selling well
Worst case he thought that sales would
stay where they were
Company does control production and
distribution but it does have to honor
contracts signed with stores.
Herb Greenberg’s Investigation
Herb Greenberg is an columnist for CBS Market Watch
Receivables for the first six months of the year rose
faster than sales
The company was hesitant to respond to questions
about this.
Turns out Cadbury Schweppes accounted for 18% of
sales for the 1st half of the year and 31.5% of Hansen’s
DSD (Direct Store Delivery)
Promotional spending was suppose to increase but
instead decreased
Some believe Cadbury Schweppes got some form of
incentive to buy more product which explains why the
receivables went up so much last quarter.
Taste Testing
Taste depends on individual preference.
After talking with multiple groups of
people nobody seems to have a strong
preference.
Monster provides no individual taste that
separates it from the rest of the group.
Everyone still orders Red Bull Vodka or
Red Bull Jager at bars
Red Bull Dominates Bar Scene
Red Bull sued bars in New York, Las
Vegas, and Philadelphia for using other
energy drinks when someone asked for a
Red Bull Vodka
Red Bull won the three cases and settled
for undisclosed terms.
So unless people start asking for Monster
and Vodka (unlikely) there is no threat to
the Red Bull’s market share in bars.
Red Bull
Dear James,
Red Bull is confident with its current 8.3 oz can size, and knows that
larger cans are just insecure cries for help. Trust me, 8.3 oz of Red
Bull is all you need. Remember, good things come in small
packages. I hope that answers your question!
But we do realize that some people want bigger quantities, and to
help out, the Red Bull 44-pack is available. The same size can but
quadruple the total ounces. Still want more? Red Bull also comes by
the case, which should leave some extra change in your wallet.
Good luck on your research!
Andrea Gomez
Red Bull North America
Hands on Research
9PM Friday
Location: My apartment
Conclusion:
They all mix well with Vodka and Jager
1AM Saturday
Location: Down Under
Management
No one has outright purchased shares since at
least January 2004
Rodney C. Sacks and Hilton H. Schlosberg
bought the Hansen juice and natural sodas
brand in 1992 for $14.5 million
Both men came from South Africa
Sacks was a lawyer and Schlosberg worked for a
large conglomerate, hence no background in the
beverage industry
Schlosberg modeled Monster after Red Bull after
he saw how big it became in the U.K.
Are price wars a possibility?
There is no conclusive data on whether or
not the energy drink market is still
growing.
Many believe the market is still expanding.
If this is the case companies usually will
not start to cut prices until the market is
mature.
Investment Risks
Cadbury Schweppes does not have an energy
drink so they could be a good candidate to
purchase Hansen.
Does it have any plans to expand overseas?
Does Hansen continue to gain market share and
has it reached all parts of the United States?
Since the companies financial are so dependent
on one product any good news could greatly
propel the company upward.
The energy drink market could still be growing
steadily.
Recommendation
Moderately Bearish
Current price is $48.20
Wait a week or two to see if it breaks through
the resistance level at about $53
Also I would like to contact the analyst at Adams
Harkness who loves this stock sooooo much.
Contact Cadbury Schweppes about possible
merger.
Do you want to be
drinking something
that makes you look
like this guy?
Any Questions?
US energy drink: 1 billion
Europe: 2.5 billion
Europe pop: 450 million
US pop: 300 million 1.5 billion
Monster appearance and character (skateboard) is not
attractive for Europe
No control over distribution
Sales slow
No good reason to switch from red bull to monster
The rest of the us is not going to drink it like they do in California
No one has purchased any stock in a while
If price wars continue the big guys win out
When does the price war begin, usually people say it doesn’t start
until a sector has matured and when margins are so high at 60%
High fuel prices could cut into discretionary spending especially
where is so high