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Monster Beverage Strong on TCCC Deal, Costs Hurt Margins

Zacks

Monster Beverage Corporation’s MNST strong product portfolio, deal with The Coca-Cola Company KO and innovation raise hopes. However, higher costs pertaining to product innovation are hurting margins.

Recently, this marketer and distributor of energy drinks and alternative beverages announced third-quarter fiscal 2017 results.

The company reported adjusted earnings of 40 cents per share, in line with the Zacks Consensus Estimate. Net sales of $909.5 million beat the consensus mark of $901.1 million by 0.9%.

Meanwhile, shares of Monster Beverage have gained 42.9% year to date, outpacing the industry’s gain of 14.8%. Estimates for the current quarter and year have also inched up 2.8% and 0.7%, respectively, over the past two months, reflecting analysts’ optimism over the stock’s prospects.




Key Growth Drivers

Monster Beverage has a wide range of brands such as Monster Energy, Java Monster, X- Presso Monster, Worx Energy and Vidration. Further, the addition of Coca-Cola’s energy drink brands has strengthened Monster Beverage’s position.

The Coca-Cola deal, also denoted as TCCC deal, provides Monster Beverage full access to Coca-Cola’s world-class global distribution network. Under the agreement, Coca-Cola and its bottling partners act as Monster Beverage’s preferred distribution partner globally, thereby ensuring greater exposure for the company’s products. TCCC subsidiaries accounted for approximately 21% of the company’s net sales in the first nine months of 2017. Notably, Monster Beverage’s cash position received a major boost from the deal, which has encouraged it to consider a return of capital to its shareholders through share repurchases. Moreover, the brands acquired from TCCC, which produce concentrates or beverage bases, are high-margin products that make significant contribution to sales and gross margins.

In addition to the deal, product innovation acts as a major growth driver. The company regularly introduces new flavors to existing products.

Moreover, due to growing health awareness, consumers are now particularly vigilant about the use of artificial sweeteners and high sugar content and are moving toward alternatives such as energy drinks. This has been denting sales for most beverage companies like PepsiCo, Inc. PEP and Dr Pepper Snapple Group, Inc. DPS. Monster Beverage in addition to carbonated soft drinks has a portfolio based on energy drinks, which should drive the company’s top line in the near term. In fact, net sales at the segment, comprising Monster Energy drinks as well as Mutant Super Soda drinks, increased 11.4% in the first nine months of 2017.

Concerns

Despite the company introducing the new Mutant along with increased distribution, total Mutant sales have not been promising so far. Again, delays in Hydro, production capacity shortages related to Java Monster and Muscle Monster raise concerns. Moreover, although the company is trying to recover from operational limitations, Java Monster production issues have negatively impacted sales so far in 2017.

Meanwhile, Monster Beverage’s increased marketing spend to boost top-line growth and attract customers is likely to build pressure on margins. Operating expenses increased 15.1% year over year in the first nine months of 2017. Monster Beverage’s operating margin fell 10 basis points (bps) in the same time frame owing to higher general and administrative as well as marketing expenses on international expansion.

Nevertheless, various innovative sales-boosting efforts are expected to drive the top line for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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