Coverage Initiated: Hansen Natural Corporation (HANS)

Though the recession may have meant forgoing the purchase of that sports car, consumers generally don't give up the little, affordable pleasures in life - at least according to the way Hansen Natural Corporation's (NASDAQ:HANS) shares have been acting of late. 

After taking an undeserved 70% hit between the fall of 2007 and the fall of 2008, the stock has rallied firmly off its October lows. The recent rebound would be daunting were it not for one thing - the P/E is still under 20, and this specialty-beverage maker continues to make money hand over fist. 

So, there's still a lot of untapped opportunity with HANS shares at their current price of $35.07. That's roughly half of where they were trading a little over a year ago, and the company is doing far better now than they were then. 

In other words, it may be time to step into a long-term position in this undervalued equity. 
 

Fundamental Overview

Hansen is described as a developer and distributor of specialty beverages in the United States and Canada. Their product line includes soda, juice, and energy drinks. Each is known for being made with natural ingredients, and most without caffeine. That description, however, doesn't adequately describe the cult-like following the company has as a customer base.
 

Those loyal fans are the underpinnings for some incredible numbers too. Take earnings growth for instance. In their last reported quarter (ending on September 30th) Hansen managed to improve earnings by 14.5%. Operating margins weigh in at 25.9% over the course of the last year, and net margins were 17.2% for the last twelve months. That's among the best for any company in most any industry during that time.

In terms of valuation, a P/E of 19.3 isn't dirt cheap, but is reasonable given the company's growth prospects; the forward-looking P/E (twelve month) is only 13.4. 

For the last year, the ROE is 39.9%, and the ROA is 28.9%.

While strong ratios are nice, they're moot if the real dollars involved are small or shrinking. No problem there though - Hansen is on course for a third straight increase in annual revenue, and a third straight increase in net income. 

And we don't mean just some minor improvements either. Hansen sold $348 million worth of product in 2005, but did $904 million in sales for 2007. The sales total through the first three quarters of 2008 is $779 million, putting them on pace for another record year.

The earnings trend is just as impressive. Between 2005 and 2007, net earnings moved from $62 million to $149 million. Through the first three reported quarters of 2008, Hansen has generated $131 million in income, and Q4 is typically a strong quarter in terms of earnings. 

Analyst estimates on both measures indicate more growth is expected in the near and distant future. We don't disagree. 
 

Chart Analysis

Contrary to popular belief, timing isn't everything. On the other hand, it's nothing to dismiss either. With that in mind, the very best stock trades generally have two things going for them - strong corporate results, and a chart that's suggesting more upside potential than downside potential. 

A large part of the reason why now may be a particularly good time to step in as an HANS owner is based on Hansen's technical charts. That's not an opinion we could have voiced for the better part of 2008, as shares were still clearly falling. Things are different now though. Specifically...

1) We're finally seeing higher highs and higher lows. Volatility is still a factor, but it's at least bullish volatility. The shift from bearish channel lines to bullish channel lines is evident on our chart; October was the pivot point. 

2) HANS shares are above all their key moving average lines. Moving averages may be an incredibly simple analytical framework, but they're also very effective thanks to this simplicity. The fact that Hansen's stock is above these lines can only mean there's at least some sort of bullish momentum in place. 

Additionally, on a daily chart you can see a major unfilled gap from November of 2007 (not evident on our weekly chart). More often than not, the market tries to 'clean up' these lingering gaps by retracing its steps. If this gap can exert the kind of gravity on the stock that most gaps seem to be able to do, the existing upward momentum is due for something of a boost. 

So, while we anticipate continued volatility from this chart, we also suspect the bigger trend will remain to the upside.
 

Final Thoughts

Aside from the ongoing fiscal success of the company and the renewed strength of the chart, there's an even bigger reason we believe HANS is worth strong consideration - the company is still finding ways to grow in an environment where nearly everyone is else is scrambling to shrink. 

Competitor National Beverage Corp. (NASDAQ:FIZZ) has done moderately well in a tough environment, though their margins are paper thin and growth is minimal. Jones Soda's (NASDAQ:JSDA) chart looks a lot like Hansen's, but there's a problem - Jones Soda is incredibly unprofitable. 

One could make an argument in favor of the larger players like Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP), but those charts look weak, and/or those company's offer nowhere near the kind of growth potential Hansen does. 

In fact, investors may want to take a cue from Coca-Cola and its bottling partner Coca-Cola Enterprises (NYSE:CCE). Those two organizations recently united with Hansen in a deal to distribute Hansen's 'Monster' products. It's not like Coca-Cola needs to expand their distribution channel. They do, however, obviously want to tap into Hansen's unique product line. Hansen stands to significantly benefit from the agreement, adding to its growing top and bottom line.

In short, we rate HANS as a 'Buy'. Hansen appears undervalued relative to its potential, and is an attractive investment at current levels.