360-Degree Long & Short Value Review of Hansen (HANS, KO)

Stifel Nicholaus cut the earnings estimates for the quarter.  What is interesting is that analysts had recently raised their estimates for the company’s 2009 and 2010 earnings.  With analysts looking for $2.27 EPS in 2009 and $2.56 EPS in 2010, the forward earnings multiples are now 14.2 and 12.6.  These sound low for a former solid growth story, but we have now taken the stance that these estimates are artificially high based on the new data and the old PEG ratios are now just rear-view mirror data that has no bearing whatsoever ahead.

Sales for 2009 and 2010 are expected to be $1.14 billion and $1.24 billion, respectively, and we’d now expect these to be brought down marginally this coming week by competing analyst calls.  After all, how many companies really lie when they say hey were disappointed about something such as product sales?

New Hansen investors from here on out are not investing in the old Hansen growth story.  What new entrants have to be thinking about is earnings and quality.  The problem with Hansen is that it is a premium beverage with Monster, and even Coca Cola (NYSE: KO) has had to admit that Coke for at least a while was almost a luxury.  And those specialty coffee sales could be facing more competition as well.  The old days of 50% and 70% sales growth a astronomical P/E ratios is not what investors should be betting on ahead.

Here is the issue we see with being too hard on Hansen as a stock.  Until being long the market and buying dips does not work for more than 75% of the stocks, then why should investors be overly cautious and expect an outright implosion?  We think that would be being too hard.  But if this market is peaking after a massive run in the last three months, even for just a pullback, then this one would likely head lower.  And if it breaks under that 200-day moving average, then we’d automatically expect that rolling 200-day moving average to become the new resistance level for at least a couple of weeks. From a pure technical standpoint and assuming a neutral market, this stock could base out in the $27.00 to $29.00 range near-term.

If the company said sales were soft, then we’ll take their word for it.  If this leads to a formal earnings and revenue warning or if it leads to a net earnings and revenue miss at the next report (also assuming other analysts cut estimates), then things could get worse for Monster’s owner.

The $2.9 billion market cap also sounds high on the surface.  The company does have close to $370 million cash and investments, which can offset every penny of short-term and long-term liabilities combined by 150%.  That is before receivables, inventory, and other assets.

All things being equal, we’d probably look for a further test of that 200-day moving average before starting to build a position.  Fighting extremely weak charts with the battle being over the fundamentals is no different than catching daggers being dropped from buildings.  If shares get much lower, then starting a position for new investors would make sense.

With the specialty and premium beverage market having always been a market full of consolidation, too much price weakness for a sustained period would also make Monster’s owner another merger candidate.  It has been the subject of rumors before and it was always the premium valuations that kept it from being more than just a possibility.  The new multiples and a lower share price would finally make this one attainable from one of a half-dozen food and beverage acquirers.  At even somewhat lower share prices, Hansen would become a value stock.

It is usually more attractive to have to pay up $2.00 and when things are more solid and taking the guess out of the bottom-picking game than it is to try deciding if you need to try dollar-cost averaging when shares are down another 20% or 25%.  Hansen’s 52-week trading range is $20.52 to $44.02.

Jon C. Ogg
June 7, 2009