Investment Project (Overview): As Part, Analyze Performance

INVESTMENT PROJECT (OVERVIEW): As part, analyze performance potential industry BEVERAGE INVESTMENT PROJECT (DETAILS): Assignment: You analyze beverage industry companies coca cola,(KO) monster (MNST) . Assess industry performance years assess expected future performance, , years.

Investment project

The modern day business environment is continually challenged by emergent threats from both within and outside its immediate environment. In other words, the micro and macro environments of economic agents raise both opportunities and threats, to which the companies have to adapt in an effort to perverse their competitiveness. Some of the more relevant examples of contemporaneous challenges include the changing needs and behaviors of the customers, the changing laws and legislations, the rapid pace of technologic development or the still ongoing economic crisis.

In such a complex environment, the investors are faced with difficulties in selecting the best options to place their capitals. They must therefore complete thorough analyses of the companies targeted, as well the overall industry in which they operate. At this level, a question is being posed relative to the investment potential of the Coca Cola Company and the Monster Beverage Corporation.

In order to assess the investment potential of the two companies, a three fold analysis would be conducted. At the primary level, emphasis would be placed on the analysis of the beverage industry, followed by the analysis of the two companies, and last completed with the assessment of the companies through the lenses of valuation. Based on these three analyses, a conclusion would ultimately be formed relative to the expected future of the industry, the companies and the potential of the industry and the companies to generate a favorable return on the capital of the investor.

2. Industry analysis

The Coca Cola Company and the Monster Beverage Corporation both sell soft drinks, activating as such in the beverage industry. Similar to any other industrial sector in the country and on the globe, the beverage sector is influenced by the internationalized economic crisis.

The economic recession was onset in the second half of 2007, with the burst of the real estate bubble and the credit crush. The economic agents in the beverage industry were as such faced with decreasing demand for their products, as a result of the decreasing consumer power. In other words, as people lost their jobs and their savings, they revealed a decreased purchase power, which was also manifested at the level of the demand for beverages.

Still, both the Coca Cola Company and the Monster Beverage Company have not been severely affected by the crisis, due to two primary elements. On the one hand, there was the industrial characteristic of the products they sold, namely the fact that the soft beverages were inexpensive, and as such accessible to even the people on decreasing incomes. The second element was a company specific one, revealed at the level of the competitive strategies implemented by the firms to overcome the new threats of the recession. Some examples in this sense include an expansion of the global network, the expansion of the product line through the integration of new flavors, brand strategies, or the reliance on the advantages of the created scale economies. Today, despite the crisis and the downturn economic stage, both organizations continue to operate on positive growth rates.

At a more industry specific level, the beverages sector in the United States is characterized by the existence of numerous competing firms, out of which the more notable competitors are Pepsi Co, the Coca Cola Company or the Monster Beverage Corporation. These companies generally created secret recipes for their soft beverages, and they create concentrates for the beverage. They then send the concentrate to bottling companies, which can either be operated and owned by the beverage company, or they can be independent tertiary organizations.

The bottling companies use different technologies and equipments in their operations, and this created points of difference for the firms. Once bottled, the beverages follow a complex logistics process, through which they are sent to retailers, such as grocery stores or restaurants, from where they eventually reach the end consumer. Aside from the bottlers, the beverage companies also send their concentrates to parties such as fast food restaurants, where they are mixed with water to create the final product.

The competitive power of the soft drink manufacturers can be assessed through the lenses of the market size, the growth rate and the overall profitability of the analyzed company. The competition in the industry can be summarized as follows:

The pressure posed by the threat of new entrants is relatively decreased, due to the fact that the industry is capital intensive, raising as such barriers for penetration.

The threat of substitute products is increasing; the products likely to substitute the soft drinks include tea or bottled water, which are becoming more popular as the consumers become more health aware and responsible.

The bargaining power of the suppliers is decreased; these suppliers normally include the bottlers and the equipment manufacturers, which depend on the beverage companies for their operations and revenues.

The bargaining power of the consumers is generally increased; the main consumers are represented by large size retailers, who then resell the beverages to the final consumer. By buying in large quantities, they have high bargaining powers.

In the context so far presented, the competitive rivalry is intense; in fact, the rivalry between the beverage producers in the most threatening element in the industry (Deichert, Ellenbecker, Klehr, Pesarchick and Ziegler, 2006).

3. Company analysis

3.1. Business models

The Coca Cola Company and the Monster Beverage Company are both producers of soft beverages, creating their own recipes for their beverages, and then sending it to the bottlers, and eventually to retailers, from where they reach the final consumers. The business model implemented by the two firms is therefore similar, since none of them bottles its own beverages, but collaborates with third party bottlers. The Coca Cola products are nevertheless more popular, since they are also commonly found in restaurants, fast food establishments and other entertainment facilities. The Monster Beverage products are more commonly found in supermarkets, such as Wal-Mart or Costco, are less commonly in leisure facilities.

3.2. Competitive strategies

The Coca Cola Company is a leading power in the American and global beverage industry and it has created and maintained this position due to a combination of strategic efforts to ensure organizational competitiveness. In other words, the baseline for the company's competitive strategy includes the following:

A continuous focus on innovation. The company has intensified its effort to innovate its products and its techniques in order to create better products through more efficient and responsible processes.

The global expansion of the firm through the growth of the distribution network across the entire globe; the Coca Cola products are virtually sold on all six continents of the globe.

The expansion of the brand through the alignment of the products with the youth, as well as the famous. The company has as such become distinguished through its extensive marketing campaigns integrating celebrities, but also average youth, sending powerful messages of tradition, family values, as well as hopes of a better world.

A continuous focus on the needs of the customers, coupled with intense organizational efforts to support the development and well-being of the communities in which the firm operates (2011 Annual Report of the Coca Cola Company).

In the case of the Monster Beverage Corporation, their competitive strategy has focused on the introduction of new products, including energy drinks. Similar to the Coca Cola Company, Monster also focuses on innovation in the strengthening of its business model and competitive position. Additionally, the competitive strategy at the Monster Beverage Corporation also included the company's expansion into new global regions, such as Colombia, Cyprus, Estonia, Greece and so on, alongside with strategies for competitive pricing, packaging, new product development and promotional and marketing strategies. The Monster Beverage Company recognizes its financial limitations and admits to competing in a highly dynamic environment, against companies with more resources (2011 Annual Report of the Monster Beverage Corporation).

3.3. Competitive forces

As it has been mentioned throughout the previous section, the beverages industry is a highly competitive environment, in which the final success of the firms is based on their ability to understand and serve the needs of the market place. Currently, this could include the need to create more healthy products, such as sugar free beverages, the need to operate in a more socially and environmentally responsible manner or the need to implement pricing strategies that respond to the decreased purchase powers of the consumers.

As it has been revealed throughout Porter's five forces analysis, the most intense competitive pressure is represented by the operations completed by the other firms in the industry. In other words, the competition is driven by intense rivalry; the buyers (large retailers) have an increased bargaining power, whereas the suppliers (bottlers and equipment manufacturers) have a decreased power to negotiate with the beverage companies.

Another important force driving the competition in the soft beverage industry is represented by the strength of the company's brand -- with the note that the Coca Cola brand is significantly more powerful than the Monster brand. Aside from brand, the competitive forces include the relationship with the bottlers, the logistics network and the complexity and efficiency of the supply chain, the global expansion and the global network or the size of the market share. And furthermore, as it has been mentioned by Deichert, Ellenbecker, Klehr, Pesarchick and Ziegler (2006), the very levels of organizational profitability are important competitive forces affecting the beverage companies.

3.4. Business and financial risk

The risks associated with the two beverage companies are generally similar, due to the fact that the two institutions operate in the same industry, meaning as such that they are subjected to the same forces. Through these lenses then, the more notable risk factors include the following:

Ongoing changes in government legislations, including both the changing policies in the United States, as well as the policies implemented by foreign governments, and which impact the beverage and international trade fields

Intense competition not only from each other, but also from other companies in the market place, such as PepsiCo, Nestle S.A., Dr. Pepper Snapple Group or Red Bull GmbH.

Ongoing economic crisis, which results not only in decreased purchase power, but more so, in economic instability in the domestic and international market place.

Changes in the tastes and consumption behaviors of the global customers.

Business and financial risks resulting from exposure to international markets, through the international operations of the two firms; a relevant example at this level is represented by the fluctuations in the exchange rates, which could severely impact the financial results of the companies.

An increased reliance on bottlers, which influence the final relationships with the retailers and the customers.

Risks associated with changes in the costs incurred, such as changes in the prices of raw materials.

Operational difficulties in creating adequate estimates for demand, as well as an increased sensitivity of intellectual property rights, due to the secrecy of the recipes.

Risks associated with inventory management, managerial model, accounting practices, stock price changes, provisions in the internal documents, cash flow shortages or investment decisions (2011 Annual Report of the Monster Beverage Corporation).

Aside from the industry specific risk factors, the companies also face distinctive risks. In the case of the Monster Beverage Corporation for instance, the more notable of this risk is represented by the decreased volume of resources, resulting in a decreased competitive power within the American and global market place. In the case of the Coca Coal Company, an institution specific risk would be represented by the large size of the organization, which renders it inflexible.

3.5. Financial statements and ratio analysis

In order to better assess the financial performances of the two companies, it is now important to present the more notable financial highlights, and also to compute some of the more relevant financial ratios.

The Coca Cola Company financial highlights

In millions

2011

2010

2009

2008

Total revenues

$46,542.00

$35,119.00

$30,990.00

$31,944.00

Gross profit

$28,326.00

$22,426.00

$19,902.00

$20,570.00

Total operating expense

$35,810.00

$21,378.00

$22,759.00

$23,498.00

Net income

$8,572.00

$11,809.00

$6,824.00

$5,807.00

Total assets

Current assets

$79,974.00

$25,497.00

$72,921.00

$21,579.00

$48,671.00

$17,551.00

$40,519.00

$12,176.00

Total liabilities

Current liabilities

$48,339.00

$24,283.00

$41,918.00

$18,508.00

$23,872.00

$13,721.00

$20,047.00

$12,988.00

Shareholders' equity

$31,635.00

$31,003.00

$24,799.00

$20,472.00

Source: Google Finance

Monster Beverage Corporation financial highlights

In millions

2011

2010

2009

2008

Total revenues

$1,703.23

$1,303.94

$1,143.30

$1,033.78

Gross profit

$894.31

$680.24

$612.32

$538.79

Total operating expense

$1,246.81

$956.13

$805.99

$870.72

Net income

$286.22

$212.03

$208.72

$108.03

Total assets

Current assets

$1,362.40

$1,182.68

$1,146.95

$962.97

$800.07

$585.50

$761.84

$561.32

Total liabilities

Current liabilities

$383.24

$266.09

$318.55

$193.65

$215.12

$83.73

$325.52

$187.33

Shareholders' equity

$979.16

$828.40

$584.95

$436.32

Source: Google Finance, 2012

The financial statements reveal two financially stable companies, with massive differences between their financial capabilities. To better understand them however, it is necessary to compute several financial ratios.

Current ratio = Current assets / current liabilities

KO current ratio = 25,497 / 24,283 = 1.05

MNST current ratio = 1,182 / 266 = 4.4

Debt ratio = Total debt / total assets

KO debt ratio = 48,339 / 79,974 = 0.60

MNST debt ratio = 383.24 / 1,362 = 0.28

Return on assets = Net income / total assets

KO return on assets = 8,572 / 79,974 = 0.11

MNST return on assets = 286 / 1,362 = 0.21

Return on equity = Net income / shareholders' equity

KO return on equity = 8,572 / 31,635 = 0.27

MNST return on equity = 286 / 979 = 0.29

The computation of these financial ratios leads to the following conclusions:

Both companies are able to pay their short-term obligations, but this ability is increased for the Monster Beverage Corporation

Both companies possess more assets than debt, meaning that they are both stable, and they are therefore sound investment opportunities due to decreased risk.

Both companies are able to generate positive results through the employment of their assets, yet this ability is increased with the Monster Beverage Corporation.

Last, both companies are able to use the equity of their shareholders are transform it into organizational gains, implicitly creating more value for the capitals of their investors. Out of Coca Cola and Monster, this ability is slightly increased for the Monster Beverage Corporation.

4. Company valuation analysis

4.1. The stock prices with risk free rates

Based on the analysis conducted throughout the previous sections, it is concluded that both the Coca Cola Company and the Monster Beverage Corporation are financially stable and worthwhile investments for the future. The recommendation then would be that of investing in the two firms, but in order to substantiate it -- validate or invalidate it -- it is now necessary to take a deeper look at the values of the two firms, through several lenses, such as the stock prices or the growth rates.

The stock prices represent a useful mechanism of assessing an economic agent, yet the complexity resides in the selection of the most adequate method to computing the prices. For this purpose, the earnings per share and the price to earnings methods would be used, as these reveal the individual profitability of an invested share, as well as the Earnings per share = (Net income - Dividends on preferred stock) / Average outstanding shares

KO EPS = 8,572.00 / 4,526 = 1.89

MNST EPS = 286.22 / 174.28 = 1.64

Price to earnings = Market value per share / Earnings per share

KO P/E ratio = 36.65 / 1.89 = 19.39

MNST P/E ratio = 45.47 / 1.64 = 27.2

Based on these calculations, both companies seem able to collect investors' money and transform it into gains, yet the expectations of the investors are higher in the case of Monster Beverage Corporation, as its P/E ratio is higher then Coca Cola's, meaning as such that this share is expected to retrieve higher earnings in the future (Investopedia, 2012).

4.2. The dividend discount model and the capital asset pricing model

The dividend discount model and the capital asset pricing model (CAPM) are two important models to assessing the cost of capital to the investors. With the dividend growth model, the cost of equity is computed as revealed in the formula below: