Hansen Natural (HANS) declared fourth quarter results for the financial year ending 2010 reporting an EPS of $0.53 compared to an EPS of $0.57 in the same quarter last year. Sales increased 9.5 percent from $290.9 million to $318.7 million. For financial year 2010, the company reported an EPS of $2.28 on revenues of $1.304 billion compared to an EPS of $2.21 on net sales of $1.143 billion in 2009.
Profitability
In 2010, gross margins reduced from 53.6% to 52.2% owing to increased promotions to support international expansion and product mix. Operating margins also reduced from 29.5% to 26.7%. However, the company did increase the free cash flow as a percentage of net sales.
The return on invested capital has been erratic but solid in my opinion. The ROIC has ranged from 55% to 30% during the last 5 years. The average ROIC during this period was approximately 40%. Based on the company’s future growth prospects (predominantly in Europe and Latin America), I believe that the ROIC in the future will hover the existing 30%.
The table below presents the profitability metrics for HANS.
Year | Gross Margins | Op Margin | Net Margin | FCF/Sales |
2006 | 52.3 | 26.2 | 16.17 | 11.81 |
2007 | 51.7 | 25.5 | 16.52 | 14.2 |
2008 | 52.1 | 15.8 | 10.45 | 18.65 |
2009 | 53.6 | 29.5 | 18.26 | 11.6 |
2010 | 52.2 | 26.7 | 16.26 | 16.6 |
Source: Morningstar
The cash conversion cycle (CCC) for Hansen Natural in the year 2010 increased from 62 days to 66 days. This increase was primarily due to the increase in Days Sales Outstanding (DSO) from 24 days to 29 days. This is to be expected since Hansen Natural introduced its Monster brand in several European countries during the period. Importantly, Days Inventory Outstanding (DIO) reduced from 77 days to 76 days. The management identified the reduction of inventories days as a major focus area. The CCC of 66 days compares favorably to Coke’s (KO) CCC of 67 days. It should be noted that Pepsi (PEP) has a CCC of -55 days since its Days Payable Outstanding of 131 days handsomely exceeds the DIO and DSO.
Growth
In 2010, the company increased its revenues by 14% while the operating income and EPS increased by a paltry 3%. However, over the long term, the growth in operating income and EPS match/exceed the growth in revenues which is a good sign. During the past 3 years, HANS has increased its revenues at an annual rate of 13% while its operating income and EPS have increased by 15% per annum. Going forward analysts expect the company to increase its earnings at annual rate of 12% to 15%.
Implied Growth: Applying Graham’s formula to determine intrinsic value of a company, at its current price of $61, the market expects the company to grow at an annual rate of 8% which is conservative in my opinion. However, based on my discounted cash flow model, the implied long term (10-year) growth rate of the company is 12%.
Retained Earnings
Hansen Natural does not issue dividends. Instead the company has a policy for giving back to the shareholders from time to time via share buybacks. During the last 5 years, the company has retained approximately $678 million in earnings. During the same time period, the net income has increased from $98 million to $212 million. Thus, the company generated a return of 17% on the retained earnings. This impressive return justifies the company’s policy of retaining a significant portion of its net income. Put another way, the share price increased from $20 to $52 during the 5 year period translating into a capital gain of $4 for every dollar retained by the company.
Valuation
Based on the review of the company’s 10-K and after having attended the conference call discussing the 2010 financial results, I have updated by discounted cash flow model and made several changes to my assumptions. I now expect the company to grow an average annual rate of 13% for the next 5 years (14% in 2011). For years 5 through 10, I project a 6% annual growth rate with a 3% perpetuity growth rate. I have also modified by margins assumptions. Based on guidance from the company, the European markets are expected to deliver lower margins. Therefore, I estimate that the company will deliver gross margins and operating margins of 51% and 25.5% in the near term owing to regional and promotional factors.
The company currently has $599 million in cash and equivalents and no long term debt. My discounted cash flow model indicates a fair value of $53 a share. On a relative valuation basis, based on my estimates of P/E, P/S and P/CF obtained from historical analysis, Hansen Natural has a fair value of $57 a share. Combining the two estimates, the fair of HANS is $54 in my opinion.
Earnings Estimate
For financial year 2011, I project the company to report an EPS of $2.62 a share on revenue of $1.48 billion. This is towards the low end on average analyst estimates of 2011 EPS of $2.74 on revenues of $1.52 billion.
Applying a P/E of 23 to my 2011 EPS estimate, I increase my 12-month target price for HANS from $58 to $61. With the company trading at $61 (at the time of writing), I would not add to my position at these levels.
(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision)
Disclosure: Long HANS
Disclosure: I am long HANS.
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