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Hansen Natural is one of the best stock stories of the past 10 years. At the beginning of September 2003, HANS stock traded at a split adjusted $0.75 per share. Today, the stock trades at about $28. That's an annualized return of 106% per year! With a $10,000 investment in 2003, you would be sitting on stock worth about $373,000 today! Even more amazing is that, at this $28 price, the stock is cheap enough to show up in the Magic Formula Investing screen. If you would have sold that investment when the stock topped out at near $68 in October of 2007, the investment would have earned a return of 146% per year! Amazing!

As with all growth stocks though, Hansen has come crashing back to earth. These are the times when these rocket growth stocks become attractive to value investors like us. Hansen won't come close to it's 5 year figures of 48% annual revenue growth and 92% operating earnings growth, but the latest quarter showed a company that is still growing. Let's look a bit closer.

Hansen Natural produces energy drinks, the most well known of which is the Monster Energy brand. The company's meteoric growth has been due to the expanding popularity of the energy drink segment, combined with the gradual roll out of Monster Energy across North America. Hansen has also done a good job consistently developing new products, a must in the cutthroat world of beverage sales. Some new products include niche energy brands like Lost, Joker Mad, Rumba, and coffee based drink Java Monster.

Hansen stock has some attractive qualities for investors. Contrary to noise on the Street, the company is still growing. Second quarter results showed 15% revenue growth and 32% earnings per share growth - solid numbers for a growth company, let alone a potential value based investment. Monster Energy continued to take market share from leader Red Bull. Distribution agreements with heavyweights Anheuser-Busch in the U.S., Pepsi in Canada, and Cadbury in Mexico ensure that Hansen's products get shelf space at convenience stores, and the company is rolling out product into the U.K. as well. The balance sheet is rock solid with 200 million in cash vs. no debt. Capital allocation has been outstanding, with a 97% trailing twelve month MFI return on capital figure, and a 5-year average over 140%, very lofty figures. Cash flow is also strong with a free cash flow margin hovering around 15%, although the cash conversion cycle is not that great (cash flow is routinely less than reported earnings due to inventory and A/R buildup). The current earnings yield of 10.4% is cheap relative to competitors and the market, although free cash flow yield is less impressive at 6.2%. In short, I feel that Hansen is a good company trading at a good price, and worthy of consideration for a Magic Formula Investing portfolio.

However, MagicDiligence stops just short of recommending Hansen as a Top Buy recommendation. It all comes back to the durability of high returns on capital. Hansen has done a great job over the past 5 years, but that was within the context of a strong market for energy drinks, few competitors, and a huge geographic canvas to expand upon. The landscape is changing in energy drinks. Now Hansen faces not just Red Bull, but heavyweights Pepsi (Amp, No Fear, Adrenaline Rush), Coca-Cola (Full Throttle, NOS) and Anheuser-Busch (180), as well as a litany of energy drink specialty brands (Rockstar, etc.). Competition brings prices down and makes shelf space more difficult to secure. It also forces higher spending on both advertising and new product development. All of this is deadly for profit margins.

There are also some other concerns. Prices for raw materials have been rising, pressuring gross margins. And consumer tastes can change with the winds. Energy drinks have been hot, and still are today, but are we looking at a fad or a durable product line? Time will tell. Lastly, with the U.S. conquered, Hansen must turn towards international markets which are more expensive and difficult to penetrate.

With great financial health and fat margins combined with continuing growth and a cheap stock price, Hansen is a good buy. Just realize the future is a lot more cloudy then the recent sunny past.

Steve owns no position in any stocks discussed in this article.

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