Monday, November 10, 2008

Marcial: These Ingredients Could Boost Hansen Natural

Marcial: These Ingredients Could Boost Hansen Natural

The fizz in the stock of beverage outfit Hansen Natural (HANS), whose brands include the No. 1 "energy" drink, Monster Energy, has gone flat as investors worry that the global economic slowdown could sour consumer demand for such products. The stock, which ran straight up from 12 a share in mid-2006 to a 52-week high of 61.77 on Nov. 6, 2007, was down to 23 on Nov. 7, 2008.

The global economic downturn is real enough, but the concern about its impact on Hansen may be exaggerated in light of the continued strong fundamentals that have been fueling the company's strong sales and earnings growth since 2004. On Oct. 6, Hansen posted record third-quarter results, with net sales jumping 15.3%, to $285 million, and net income climbing 14.5%, to $52.4 million, or 54 a share, vs. 46 a year ago.

In addition, there is a new development—a distribution agreement with Coca-Cola (KO)—that should excite investors for two reasons: It will expand Hansen's distribution base in Western Europe, and it will generate buzz that Hansen could become a buyout target for soft-drink giants such as Coca-Cola and PepsiCo (PEP).

On Oct. 5, Coca-Cola signed a pact to distribute Hansen's products in some European countries (Britain, France, Belgium, the Netherlands, Luxembourg, and Monaco) as well as in Canada and in certain U.S. states and territories. PepsiCo and Anheuser-Busch (BUD) already market Hansen's beverages in other parts of Europe. Hansen's distribution agreement with Dr. Pepper Snapple Group (DPS) in some U.S. markets may be terminated, analysts predict, because of the Coca-Coca partnership.

But the Coca-Cola connection "greatly enhances future sales as it will rapidly expand Hansen's marketing base," says Gregory M. Estes, portoflio manager at Intrepid Capital Management, which owns Hansen shares. On top of that, "I definitely think there is a potential for Coca-Cola or Pepsi to come up at some point and acquire Hansen, since the company's market cap is only $2.4 billion," says Estes. Coca-Cola has $8 billion in cash on its books, he adds, and neither it nor PepsiCo is dominant in the all-natural and energy-drink category.

The top three energy drinks, says Estes, are Monster, followed by Red Bull and Rockstar. PepsiCo's AMP drink is fourth, and Coke's Full Throttle is in fifth place. Hansen markets natural sodas and drinks, including juice blends, fruit juice smoothies, multi-vitamin juice drinks. and energy drinks such as Monster Energy, Monster Hitman, Lost Energy, and Java Monster coffee.

Estes says Hansen is an attractive buy in many ways. "Hansen's operating margin of 25.5% in 2007 is right up there along with Coca-Cola's 26%," he notes. And its sales growth rate has been quite impressive: a 57% annual pace in the past five years. He concedes that such sizzling growth can't be sustained as the business matures and as the economic downturn starts to affect demand. But operating profits, Estes figures, will still grow at about 10% to 15% in 2008 from 2007's level, fueled in part by Hansen's increasing market share in the energy drink category.

Hansen's balance sheet is clean, notes Estes, with almost zero debt and with cash of $205 million. Yet the stock is selling as if Hansen's beverages "were off-brand." He points out that shares of National Beverage (FIZZ), which makes the Shasta and Faygo drinks, are trading at more than 9 times trailing 12-month earnings before interest and taxes, while Hansen is trading at just 8.5 times. And National's price-earnings ratio is 15.92 times its estimated 2010 earnings of 50 a share, vs. Hansen's p-e multiple of 11. Hansen's p-e was as high as 45 in 2007.

Nira Maharaj of investment research outfit Value Line (VALU) says the Coca-Cola agreement potentially adds 25 a share to Hansen's 2009 earnings. New products are also in the works, says the analyst, "which should enhance profits further out." Maharaj forecasts earnings for Hansen of $1.80 a share in 2008 on estimated sales volume of $1.02 billion, and $2.05 a share on $1.15 billion in 2009.

Of the 11 analysts who follow Hansen, none recommend selling the stock. Four rate it a buy, and seven tag it a hold. One bull is Damian Witkowski of investment management firm Gabelli & Co.. Witkowski expects Hansen to step up stock repurchases with its $380 million cash on hand. He puts the value of Hansen at 49 a share.

Hansen's new marketing pact with Coca-Cola opens the door, not only to establishing to a wider distribution network overseas and in the U.S. but to a possible full merger, That could create some buzz around the shares at their current price.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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