In recent years, Coca-Cola (NYSE:KO) and Monster Beverage (NASDAQ:NASDAQ:MNST), two industry leaders in the beverage sector, have been on divergent paths. Despite Coca-Cola's stock trading at a lower valuation of 5.7 times revenue compared to Monster's 8.7 times, and Monster demonstrating superior revenue growth and a stronger financial position, an analysis of various factors suggests that Coca-Cola may offer higher returns over the next three years.
Monster Beverage has seen impressive revenue growth with an average annual rate of 14.6% over the past three years, outpacing Coca-Cola's 5.6%. This growth is attributed to strong demand for its energy drinks, new product launches, and international expansion. On the other hand, Coca-Cola's revenue growth has been supported by both at-home and away-from-home channels due to robust pricing trends. In addition, its North America and Latin America segments registered a notable 19% year-over-year sales growth in 2022.
Monster Beverage also outperformed Coca-Cola in terms of returns over the past few years, posting a remarkable 120% return compared to Coca-Cola's 8% decline and the S&P 500 index's 15% increase.
Despite slower sales growth, however, Coca-Cola remains more profitable. Its operating margin slipped from 29.9% in 2019 to 28.8% in 2022, while Monster Beverage's fell from 33.4% to 25.1%, largely due to rising costs.
In terms of financial risk, Monster Beverage has an advantage with cash making up 35% of its assets compared to Coca-Cola's 14%. Furthermore, Coca-Cola’s debt-to-equity ratio sits around 16%, whereas Monster Beverage operates debt-free.
When it comes to valuation multiples, Coca-Cola appears more attractive. It's expected to see its price-to-sales (P/S) multiple expand, potentially leading to better returns over the next three years. Currently, Coca-Cola's stock trades at 5.7 times sales compared to its five-year average of 6.8 times, whereas Monster Beverage's stock trades at 8.7 times revenues versus its five-year average of 4.9 times.
Monster Beverage's higher P/S multiple is somewhat justified by its strong revenue growth, but the current figure of 9 times sales seems stretched, particularly given its operating margins are lower than the 33% level seen in 2019, before the pandemic hit.
In conclusion, while Monster Beverage has shown superior revenue growth and a stronger financial position, Coca-Cola's profitability and lower valuation multiple indicate it might offer better returns over the next three years. Machine learning analysis predicts an expected return of 8% for Coca-Cola and a -1% return for Monster Beverage over this period.
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