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HANS AT A GLANCE

P/E ► 23.2 AVG EV/EBITDA ► 15.6 AVG ROA ► 18.3% HIGH ROE ► 24.5% HIGH Debt to Equity ► 0.428 LOW Current Ratio ► 5.46 VERY HIGH Interest Coverage Ratio ► 5K VERY HIGH

 

 

 

 

 

 

Hansen Natural (NDAQ:HANS), is the largest energy drink company in the United States.^[1] The company's flagship Monster Energy® brand accounts for approximately 90% of revenue and is is the market leader in energy drinks with a 29% market share.^[2]

Unlike other beverage companies, Hansen does not produce, bottle, or distribute any of its products. Instead, the company relies on agreements with third party producers and bottlers for the manufacture of its drinks line.^[3] Hansen also has agreements with Coca-Cola Company (KO) and Anheuser-Busch Companies (BUD) to distribute its products across the US. Through these agreements, Hansen is able to gain economies of scale in distribution that allow it to compete with larger diversified beverage companies.^[4] Since Hansen does not produce its own beverages, it is primarily purpose is to develop and market its products. Because of this, Hansen is a relatively lean company, with less than 1,300 employees.^[5]

Hansen is highly exposed to raw materials costs. Prices for the most important input materials, aluminum, PET plastic, dairy products, sugar, and juice concentrates fluctuate widely. For example, aluminum prices have fallen more than 60% from their 2008 highs of $1.50/pound to less than $0.65/pound.^[6] Hansen should benefit from lower input prices after the collapse of the commodities super spike of 2008.

Company Overview

Number of Cases Sold and Case Priceref name=HANS58> hans 2008 10-K pg. 58   </ref>

Hansen is the largest developer and marketer of energy drinks, with approximately 29% of the US market.^[1] The energy drinks sector is amongst the fastest growing in the beverage industry and the market was estimated to be worth $4.8 billion in 2008, an increase of 400% since 2003.^[7] Led by its Monster energy drink brand, the firm has generated impressive growth since 2004. In 2008, the company posted revenues of $1.03 billion, a 14.3% increase from 2007; net earnings fell 27.7% to $108 million.^[8] The fall in net income is entirely attributable to a $102 million charge relating to the termination of existing distribution agreements and the transfer of distribution rights to Coca-Cola Company (KO).^[9] Ignoring the charge, net income would have grown 40% to $210 million.

Hansen's revenues since 2004 have grown through both higher sales volume and retail price increases. Hansen reports its sales in terms of cases, which are equivalent to 192 US ounces of beverage. Between 2004 and 2007, the company's case volume increased at a nearly constant rate. The growth rate shrank in 2008 due to weak sales in Q4 prompted by the economic downturn. Average price per case has also risen since 2004. This is primarily due to price increases in Hansen's Monster Energy® line of products.^[10][11]

In December 2009, Hansen launched a line of ready-to-drink iced teas under the "Peace Tea" brand. By the end of the month it was reported that the company was in talks with Coca-Cola Enterprises (CCE) to get Peace Teas into the Coke distribution network.^[12] The product will compete with products by iced tea market-leader AriZona, Snapple, Coke, and Pepsi, however through 2009, the iced tea market grew 1.8%.^[13] Peace Teas are priced at $.99 in an effort to compete directly with AriZona teas, but they will also vie for market share with new iced tea products from Anheuser-Busch and other small companies focused on this fast growing beverage sector.^[14]

Quarterly Earnings

Q1 2009

In the first quarter of 2009, Hansen Natural posted revenues of $279 million, a 14.3% increase from Q1 2008 figures; net income rose 44% to $42 million.^[15] The increase in revenue is primarily a result of higher sales of the company's Monster line of energy drinks as well as net pricing increases across the entire product line. Total cases sold grew by 5.4% as average sales price increased by 9.2%.^[16] The increase in net income is due to a sales mix shift to the Monster line of beverages, as they have higher margins than the company's other products. Additionally, Hansen benefited from lower prices for several of its key inputs.^[16]

Q2 2009

In the second quarter of 2009, Hansen Natural posted revenues of $345 million, a 6.7% increase from previous year's figures; operating income rose 18.7% to $92.8 million.^[17] Increases in revenue were driven by the company's flagship Monster energy drink, which benefited from increasing shelf space as a result of Hansen's new distribution agreements with Coca-Cola Company (KO) and Anheuser-Busch InBev (EBR:ABI) . Gross profit margin grew two points to 53.9% due to cost reductions related to these agreements. Additionally, the company is enjoying growth outside of the United States, where revenues grew 46% to $39.4 million. During the quarter, Hansen launched several new products, including Monster Energy Import and Nitrous Monster Energy, both of which come in resealable aluminum cans. With these new offerings, Monster has managed to grow revenues, even as consumers have cut back on spending due to the recession.^[17]

Q3 2009

In the third quarter of 2009, Hansen Natural 's revenues were $307.9 million, an increase of 8% from Q3 2008; net income grew nearly 7.8% to $56.5 million.^[18] The increased revenue was due primarily to record third quarter sales of Monster Energy drinks, however it was slightly offset by a decrease in sales of Java Monster beverages. As the company's second largest brand, Java Monster accounted for 13.1% of total sales in this quarter.^[19] Total Case sales increased 6.4% compared to the same period last year.^[20] The energy drink sector accounted for 91.7% of the company's net sales in Q3 2009, compared to 90.4% in the previous year. For the energy drink industry as a whole, sales declined by 1.1% during the third quarter compared to the previous year, however sales of monster grew 3.3%. During the quarter, Monster's market share increased 1.2 points to 28.8%.^[21] Hans Natural continues to grow their international presence with gross sales increasing nearly 63% to $50 million, which includes sales to the US military.^[22] Expanding their product line, the company plans to launch a new line of ready-to-drink iced teas under the "Peace Tea" label on December 21, 2009.^[23]

Operating Segments

Hansen operates two main business segments (operating expenses are not allocated to either segment so individual segment net income is not reported):

Direct Store Delivery (90.7% of revenues)^[24]

The Direct Store Delivery segment develops, markets and sells energy drinks through an exclusive distributor network. Hansen's major distributors are Coca-Cola Company (KO) and Anheuser-Busch Companies (BUD).^[25] Products in this division include:^[26]

• Monster Energy®
• Java Monster Energy®
• Lost® Energy™
• Joker Mad Energy™
• Unbound Energy®
• Rumba™ brand energy juice

Warehouse (9.3% of revenues)^[24]

The Warehouse segment develops, markets and sells juices and sodas directly to retailers. The largest purchasers of Warehouse products are Wal-Mart (WMT), Kroger Company (KR), and Safeway (SWY).^[27] Products in this division include:^[28][24]

• Hansen’s® Natural Sodas
• Blue Sky® Products
• Hansen’s® Natural Juices
• Hansen’s® Iced Teas

Trends & Forces

Hansen Must Capture Growth In Energy Drink Market

From 2003, the energy drink market grew at an annualized pace of 38%, reaching $4.8 billion in 2008.^[29] Since energy drinks accounted for more than 90% of Hansens' total revenue in fiscal 2008, the company will have to capture this trend to continue growing revenue. The energy drink sector of the beverage industry is exploding, encouraging new and traditional beverage companies to develop their own energy brands. Hansen's energy drinks compete directly with Red Bull, Rockstar, Full Throttle, No Fear, Amp, Adrenaline Rush, 180, Extreme Energy Shot, Red Devil, Rip It, Nos, Boo Koo, Mountain Dew, Mountain Dew MDX, Vault and many other brands. Additionally, with Starbuck's introduction of its line of coffee energy drinks in late 2008, Hansen's Java Monster line will face increasing competition in this sector of the energy drink market. Hansen must maintain its market share in the face of new market participants to be successful.^[17]

Commodity Cost Fluctuations Affect Margins

2007-2009 PET resin prices, ¢/pound ^[30]

Hansen profitability can be affected both directly and indirectly by the costs of various production inputs. Hansen itself is responsible for purchasing the raw materials used to make its concentrates and syrups. Variations in the prices for these goods can affect the company’s total cost of production as well as its profit margins. Changes in the production costs of bottlers can also impact Hansen's profitability. If the raw materials necessary for bottling become more expensive, the bottler may be forced to drastically raise prices to compensate. Such a price increase would hurt Hansen, given the competitive nature of the energy drink industry, and provide a possible incentive for consumers to switch to other companies’ beverages. Aluminum, corn, and PET resin are three examples of such production goods used by bottlers that could have significant bearing on Hansen’s profit margins. In 2007, the prices of these commodities rose drastically with general commodities bubble and dramatically pressured margins. They receded in 2008, but the possibility of another significant rise in Commodities represents a constant threat to profits.

The Global Economic Recession Threatens Overall Demand

As the world economy slides deeper into recession, Hansen will become subject to the trade-down effect, in which consumers trade down to cheaper goods to save money. With the 2008 Financial Crisis putting the brakes on consumer spending, Hansen may be forced to cut prices to maintain demand.

Competition

The beverage industry is highly competitive. Hansen competes against a variety of companies in two markets: soft drinks and energy drinks.

Soft Drink Market Share

Hansen is a relatively small contender in the soft drink market. Although Hansen's Sodas may appeal to a small group of organic minded shoppers, they cannot compete on a national scale with established soda companies like Coca-Cola Company (KO) or Pepsico (PEP).

Energy Drink Market Share

Hansen is the largest energy drink manufacturer, with approximately 29% of 2008 US market share.^[1]

^[1]

Notes

1. ↑ ^{1.0 1.1 1.2 1.3} Coke signs deal to distribute Monster Energy drinks.
2. ↑ hans 2008 10-K pg. 35  
3. ↑ hans 2008 10-K pg. 7  
4. ↑ hans 2008 10-K  
5. ↑ hans 2008 10-K pg. 17  
6. ↑ Aluminum Price Charts.
7. ↑ Energy drink explosion hits food.
8. ↑ hans 2008 10-K pg. 75  
9. ↑ hans 2008 10-K pg. 45  
10. ↑ hans 2008 10-K pg. 43  
11. ↑ hans 2008 10-K pg. 58  
12. ↑ Peace Tea eyes a future with Coca-Cola, Atlanta Journal-Constitution, 12/30/2009
13. ↑ Peace Tea eyes a future with Coca-Cola, Atlanta Journal-Constitution, 12/30/2009
14. ↑ At NACS It Was Tea Time in Vegas, BevNET, 10/27/2009
15. ↑ HANS 2009 10-Q  
16. ↑ ^{16.0 16.1} HANS 2009 10-Q  
17. ↑ ^{17.0 17.1 17.2} HANSEN NATURAL REPORTS RECORD 2009 SECOND QUARTER FINANCIAL RESULTS.
18. ↑ HANS 10-Q Q3 2009, p. 4
19. ↑ HANS Q3 2009 Earnings Call Transcript, Seeking Alpha
20. ↑ HANS 10-Q Q3 2009, p. 36
21. ↑ HANS Q3 2009 Earnings Call Transcript, Seeking Alpha
22. ↑ HANS Q3 2009 Earnings Call Transcript, Seeking Alpha
23. ↑ Peace Tea Website, "Give Peace A Chance"
24. ↑ ^{24.0 24.1 24.2} hans 2008 10-K pg. 104  
25. ↑ hans 2008 10-K pg. 10  
26. ↑ hans 2008 10-K pg. 4  
27. ↑ hans 2008 10-K pg. 14  
28. ↑ hans 2008 10-K pg. 104  
29. ↑ Energy Drink Market Exploding: Mintel.
30. ↑ [1]
31. ↑ Beverage Digest, Top 10 Carbonated Soft Drinks in 2006
32. ↑ You must specify title = and url = when using {{cite web}}..