Does Monster Beverage (NSQ:MNST) have an economic moat?

Does Monster Beverage (NSQ:MNST) have an economic moat?

Article image

The persistent risk of economic uncertainty and market volatility mean that it can be worth seeking out high quality stocks for your portfolio. Safe, profitable companies with strong balance sheets can offer solid returns over the long term, even in a crisis. 

The best quality companies are often some of the market's most respected names... but there are others that you might not have heard of. What makes them stand out is their ability to resist competitive threats and generate breathtaking profits. They compound investment returns at consistently above-average rates over time.

These stocks have got what billionaire investor Warren Buffett, calls economic moats. Like medieval castles, their profits are fortified by impregnable business models.

Here's a quick explainer on what makes these stocks so special - using Monster Beverage (NSQ:MNST)  as an example. 

Signs of strength

First of all, here are some of the ways that companies actually establish these very profitable competitive moats:

  • Intangible Assets - Such as brands that customers love, valuable patents or regulatory approvals
  • Switching Costs - It might be too costly, complicated or unnecessary for customers to look elsewhere
  • Network Effects - When customers become part of a product it creates tremendously powerful businesses
  • Cost Advantages - Superior processes and unique locations and assets make it hard for others to compete
  • Great Scale - Large infrastructure and distribution networks are powerful barriers to entry in many industries

When it comes to finding companies with moats, some of the biggest clues actually lie in their financial statements. Here's what they are and why they are important - and how Monster Beverage stacks up against them:

  1. High rates of Free Cash Flow - the measure of a thriving company.
    - A high ratio of free cash flow to sales can be a very positive sign. For Monster Beverage, the figure is an impressive 20.1%.   
  2. High Return on Capital Employed - the measure of a company growing efficiently and profitably.
    - A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Monster Beverage, the figure is an eye-catching 29.7%.
  3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
    Monster Beverage has a 5-year average ROE of 26.5%.
  4. High Operating Margins (compared to peers) - the measure of a company with pricing power
    Monster Beverage has a 5-year average operating margin of 34.1%. 

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Monster Beverage that you can find out about here.


About us

Stockopedia helps individual investors make confident, profitable choices in the stock market. Our StockRank and factor investing toolbox unlocks institutional-quality insights into thousands of global stocks. Voted “Best Investment Research Tools” and “Best Research Service” at the 2021 UK Investor Magazine awards.

Monster Beverage's StockRank™

High FlyerConservative

Monster Beverage's StockRank™

With a StockRank of 69, Monster Beverage is more attractive than 69% of the 9,636 stocks we cover in North America, according to our proprietary ranking system.

See the full StockReport

Absolutely Perfect

"Trialed multiple other platforms - this is by far my favourite. Other platforms do not even have half the stuff that you can find on Stockopedia. Love it!"

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.