Hansen Natural a natural choice for those who crave healthy gains

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Dear Mr. Berko: What is your opinion of Hansen Natural? I’ve tasted nine of their all-organic and natural beverages, and each is delicious. I tried two of their energy drinks, and they saved my day at the office after a long evening before. Their sodas are a little pricey, but they’re worth it. And I don’t have to worry about all those unhealthy chemical compounds that are in Coke and Pepsi. My husband and I have been drinking several of the fruit-flavored sodas, and we can both testify to the fact that the Hansen drinks have helped us lose nine and 14 pounds, respectively, in the past five months. Please tell me if you think this stock is a good investment for the next two to three years.

G.A.

Santa Monica, Calif.

Dear G.A.: Hansen Natural Corp. (HANS-$28.50) looks like a natural. This unique beverage company, founded in Los Angeles in 1930 by Hubert Hansen and his three boys, came public in late 2004, at $25 a share. The shares split 2-for-1 late last year and split 4-for-1 in July of this year. So a 100-share purchase at $25 would now be 800 shares worth nearly $23,000.

This 75-year-old company that sells a surprisingly popular line of all-natural organic beverages might be on to something big. Revenue and earnings growth have been phenomenal, and demand for HANS products continues to zoom.

HANS makes and markets alternative natural beverages and “natural” is the operative word here. HANS markets fruit drinks, energy sports drinks, fruit-juice smoothies, sparkling lemonades and orangeades and other fruitades to be announced. HANS also markets noncarbonated, ready-to-drink teas, juice cocktails, multivitamin juices, noncarbonated flavored waters plus the immensely popular Monster Energy, Lost Energy, Rumba and Joker Mad Energy brand names.

The company also markets natural sodas, sodas with supplements, organic natural sodas, seltzer waters and energy drinks under the Blue Sky name. HANS also markets popular vitamin and mineral drink mixes in powder form, and they’re good.

Hansen’s natural products, especially its energy products, are becoming the new drink rage. The boys at Anheuser Busch, mindful of the boom toward natural products, recently signed a distribution agreement with HANS that could nicely boost HANS’ revenue. Market share might also zoom even more because Vons, Costco, Wal-Mart, Ralph’s, Sam’s Club and Trader Joe’s are also going organic with Hansen’s natural products.

These products cost more than beverages containing toxins, contaminants, metals, flavor enhancers, colorings, preservatives, compounds and benzoates, but they won’t stain your kidneys, fulminate in your bladder or burn holes in your intestinal tract. The California Division of Health Services, recognizing this benefit, recently awarded HANS a three-year contract for shelf-stable ready-to-drink, 100 percent apple and 100 percent grape juices. It’s reasonable to expect more to come.

HANS’ revenue was $110 million in 2003. In 2004, when HANS came public, revenue inched up to $349 million. This year, that number is expected to creep higher, to $525 million. So considering the public’s heightened health awareness and growing taste for natural and organic products, the Street believes HANS’ revenue could top $1 billion by 2010. HANS’ net profit margin is 18 percent, compared with Cott, Cadbury and Pepsi’s NPMs of 2.3 percent, 9.9 percent and 14.2 percent, respectively. Only Coca Cola has a better NPM than HANS, at 23 percent.

HANS has no debt, 91 million shares outstanding and should earn $1.11 this year and $1.60 in 2007, with cash flow per share about equal to earnings. Observers are certain that the company’s next few years will easily exceed Wall Street expectations. Whole Foods, Kroger’s, Safeway, A&P and other large supermarkets may soon carry HANS products, as will many vending machines and convenience stores. The California Department of Health Services has contracted with HANS, and it’s reasonable to assume that other states, as well as county school systems, may follow suit. HANS’ products (especially its all-natural and nutritious energy drinks) will certainly be sold in Europe, Asia and the lower Americas. Cadbury recently announced a distribution agreement to market HANS products in Mexico, so Europe and Asia may not be far behind.

HANS trades at a high 40 times next year’s earnings, but the excitement of its beverages, its amazing acceptance, its superb tastes and the obvious health benefits seems to justify that price-earnings ratio.

I believe HANS — like Celestial Seasonings, Snapple, Gatorade and Arizona Tea — will be an uncommon success. These are companies, which, at the pinnacle of their revenue cycle, were purchased by much larger companies. So I wouldn’t be shocked, “gabberflasted” or astonished if Kraft, Pepsi, Kellogg or General Mills decided to take HANS to the altar. HANS would certainly make a superb fit in their product portfolios.