http://www.pencils2.com/pencilsfund.htmlPencils Fund Purchase: Hansen Natural
Purchase Price: 27.47
Purchase Date: 11/22/06
Shares Purchased: 7
Commission: 6.95
BusinessHansen Corp. operates in the beverage industry with three segments: Energy drinks, natural sodas, and juice. Hubert Hansen and his three sons founded Hansen in 1935, and they originally sold their drinks to film studios and retailers. Hansen has been innovative over its 70 years of existence, as they were the first company to make shelf stable smoothies and juices, and they really revolutionized healthy drinks. They now grow primarily through their brands and subsidiaries, engaging in the development, marketing, sale, and distribution of their products in the U.S., Canada, and
Mexico.
FinancialsSome quick financials:
Market Cap 2.48B
Enterprise Value 2.41B
Shares Outstanding 90.85M
Float 60.40M
% Held by Insiders 29.48%
% Held by Institutions 77.00%
Employees 290
Qtrly Rev Growth (yoy) 82.60%
Revenue (ttm) 479.21M
Gross Margin (ttm) 52.43%
EBITDA (ttm) 148.91M
Profit Margin (ttm) 18.36%
Oper Margins (ttm) 30.04%
Return on Assets (ttm) 47.64%
Return on Equity (ttm) 62.41%
Net Income (ttm) 87.98M
EPS (ttm) 0.899
P/E (ttm) 30.37
P/S (ttm) 5.27
Cash (mrq) $120.4M
Debt (mrq) $500K
As you all well know, Hansen's stock price has been hammered since my last purchase. Yes, the internal investigation in options could bring something up, and yes, they got a letter from Nasdaq warning of a delisting. But this review was going to have to happen sometime or another, and the company decided to do it themselves and cooperate rather than have the SEC come in. Even if they do find something, it hasn't been anything that bogs down the prices of similar companies that had similar situations. For instance, one of my holdings, NVidia, announced they had to add an extra $150 million of costs. The stock set a new high soon after that. The reason for this is because who really cares what changed from five years ago? As long as the company can go forward and continue to sell its product going forward is what's important. Hansen has a very strong balance sheet and a product that's not going away, and that's why I'm buying pretty much whatever I can with whatever I've got at this point.
Hansen's balance sheet strengthened yet again during this quarter, which again adds to my belief in the company, because they have the resources to fight something off if it comes up. People have long been saying Hansen is extremely overvalued, but with a P/E just above 30, I'm not buying this argument. Yes, they have been premium priced, but now people are ignoring the growth potential and acting almost as if this is a stalwart. This is a company that's continuing to deliver tremendous results (if 69% revenue growth YOY isn't tremendous, I have no idea what is), strengthen its balance sheet, and most importantly, the business is continuing to produce excellent cash flow. Remember that they are doing all of this while their leading product, Monster, is still in the #2 place behind Red Bull. But, the recent partnership with Anheuser-Busch just might be the thing to get them on top.
The A-B partnership is something I haven't spent a great deal of time talking about. But what this does, in short, is get Hansen products in more places distributed by A-B. The partnership hasn't come into play completely yet, and it probably won't for another 3-4 quarters. But when it does, it will only help Hansen. I think this will propel Monster to the #1 spot with energy drinks, because they now have a huge, proven company distributing their products. And Hansen certainly has the resources to get creative and continue to strengthen their brands, and I'm sure that's what management will be doing over the years. Another thought with this partnership is the possibility for Hansen to get more international than it already is. A-B does distribute products internationally, and I'm pretty sure this would be the way Hansen goes international if it ever does. But for now, Hansen still has a heck of a lot of potential here in the States, Canada, and Mexico, so I doubt we'll see international expansion anytime real soon. But overall, this partnership with A-B opens up more areas than people realize.
Risks-- Options investigation - I could be dead wrong with my views and see this investigation bring up something that makes the company go bankrupt, even with the healthy balance sheet. The only thing is that it
won't destroy the company. Hansen has reported strong cash flow for a very long time, and that's simply a very difficult thing to adjust and soup up. Every company I know of (with the exception of Berkshire Hathaway) soups up earnings in some way, either by adding tax benefits or doing some sneaky, but legal, practices. It's simply something that's changed with the business world. The point is that if Hansen does find something, the likelihood of it destroying the business is extremely small. Extra costs won't hurt them, because that's what extra cash is good for.
-- Competition - Competition is fierce in the beverage market, but Hansen has a great management team that is always looking for ways to strengthen their presence, get their products noticed, and convince people to buy Hansen. You never know what can happen though, so it'll be something to keep an eye on.
-- Delisting - On the outside chance that the company doesn't finish the investigation in time, delisting could mean trouble. The stock would definitely sink, but I highly doubt we'll see this happen. Apple has gotten the letter of doom from Nasdaq and its stock is up 30%. I'll even go so far as to predict we
won't see Hansen delisted because of this. They could stop the investigation and report earnings, but that'd only frustrate the SEC and build up trouble. Is that what the market wants? People shorting Hansen might, but I certainly don't.
ValuationFrom today's EPS of .90 (which is from the 2Q remember), I expect annual growth of 31%. To meet analyst estimates for the 3Q, Hansen needs to grow earnings 67% YOY, and I think they'll be able to do so. Since Hansen has already met my annual estimate (40%) in two quarters, I think they'll be able to meet them five years out, simply because the growth isn't going away like many people have been saying. I'm expecting a P/E of 25 five years out, which to me is very reasonable.
.90 * (1.31^5) * 25 = 86.80
My low estimate is annual growth of 22% and a P/E of 20:
.90 * (1.22^5) * 20 = 48.65
My high estimate is 35% annual growth and a P/E of 32:
.90 * (1.35^5) * 32 = 129.14
We'll see Hansen above $75 in five years.
ConclusionThis is an incredibly well-run business with experienced management, great brands, and a new partnership with a proven company that'll continue to boost the growth. The balance sheet is strengthening, as is the business value, and the market value has continued to fall. Fears that Hansen's growth is gone are overdone, fears that they are overvalued no longer make sense, and the fears that Monster's growth is done are bogus. As long as the market value is falling and the business value is rising, I'm going to continue to snap up shares.
Tags:
anheuser-busch, hansen, investing, pencils fund, stocks, valuation
Posted at: 09:31 AM | Add Comment
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