Rightsizing HANS...

HANS is a very successful beverage business. It has created a powerhouse energy brand in Monster, and is steadily making strategic changes to maximize that performance over time. Their growth has been strong, their innovation track record has been exemplary, and their profitability reflects Monster's status as a highly functional, well differentiated brand.

As a result, the brand has become a darling of the investment set's chattering classes. Rapid growth, strong profitability and a history of beverage brands being sold at massive premiums to Coke, Pepsi and Cadbury (now DPS) built a high level of expectations around the business.

But all of this was dependent on growth:

• Category growth in high margin energy beverages
• Growth in market share in energy
• Profit growth... scale benefits, Cost of Goods savings etc etc

So far this year Monster has increased share and COGs are lower - but the category is flat. And while their business is strong, CEO Rodney Sacks wanted to be clear that future growth was going to be challenging - even with the assistance of mega-distributors CCE and Inbev/AB.

This has had the result of knocking $14 off their share price, reducing the stock from $43.61/share to around $30/share in six weeks - a fall in market capitalization from around $4B to $2.7B in 6 weeks.

HANS 2008 revenue was around $1B per year, and their operating profit is around $200M before costs related to distribution agreement changes. In the normal world this would put the business value somewhere between $1.5B and $2.5B. Still a very large and successful business with significant upside as consumers continue to seek functional beverages. A position that would allow the business to operate successfully into the future.

However, if their stock price continues to fall, it is likely that the business becomes a more attractive target for the big beverage companies. But right now it seems that the business running well, positioned for the future - but without the irrational valuation that has had many of us pondering their high stock price.