Monster's Hiding Under the Bed

Monster Beverage (NASDAQ: MNST  ) may need a shot of its own drink. The once high-flying growth story has come back within gravity's pull, as its most recent earnings report confirms. After six quarters in a row with top-line growth of 24% or more, Monster delivered just a 15% increase in sales for the second consecutive period, this time reaching $471.5 million. CEO Rodney Sacks suspected the negative publicity surrounding energy drinks in general, and Monster in particular, helped cause the slowdown. Net income for the quarter grew just 5.3% to $68 million, while per-share earnings increased from $0.35 to $0.39, assisted by share buybacks. In the fourth quarter alone, Monster spent more than $300 million on share repurchases.

Earnings missed estimates by $0.02, but investors took the report in stride as shares gained modestly the day after the report came out.

Safety concerns
Sacks spent the initial part of the call adamantly defending Monster's energy drinks against recent reports that it was implicated in a small number of deaths in which the FDA has found no causality.

In a drawn-out comparison with coffee, and Starbucks (NASDAQ: SBUX  ) in particular, Sacks refuted the accusations against Monster Energy one by one. Many critics point out that Monster is popular with teens, but Sacks said that teens consume more coffee overall than energy drinks. He also said that the general population drinks 25 times more coffee than energy drinks, and noted that Monster has no more caffeine than equivalent coffee drinks do. It's also not consumed any quicker than coffee, as coffee-drinkers like to finish their beverages before they become cold. Critics have also attacked Monster for calling itself a "dietary supplement" under FDA regulations, but Sacks explained that FDA restrictions on dietary supplements are tighter than on food products. Under the advice of the American Beverage Association, Monster has since changed its categorization to a "food product."

While Sacks' principal intention was to rebuff the health-related accusations toward Monster, there was also a powerful subtext. Coffee is a clear competitor to Monster, and the size of the coffee market is huge. By repeating the similarities between coffee and energy drinks, Sacks is hoping to convince a few Starbucks drinkers to switch to his product. Even just grabbing a small chunk of the coffee market could help Monster double sales.

International expansion
Monster continued to build sales overseas in the quarter. Sales outside the U.S. grew nearly 30% in the quarter, and the company showed particularly strong growth in Europe. In the U.K., its market share has improved to 10%, and that country is now its second-biggest market. Monster also entered new markets including Peru, Slovenia, South Korea, Chile, and Singapore in the quarter and in the beginning of 2013. It's also planning to enter India as well as other countries this year. Expenses related to developing new markets ate into gross margins, as North American gross margins improved on a year-over-year basis, though companywide they fell from 52.3% to 51.7%.

Foolish bottom line
With weakness in a number of drink categories including its Worx energy shots down substantially as well, it's clear Monster is facing a number of headwinds. Considering the stock's pullback over the last year, shares don't seem in danger of falling severely, but still carry a relatively lofty valuation. If sales continue to hover in the 15% range, shares will not be able to reach their former glory.

Going ahead, the safety questions and ability to claim market share in international markets will determine Monster's success. But, as the last two quarters seem to indicate, Monster's days as a fast-growing juggernaut appear to be over.

The stakes are high for Monster Beverage these days. The stock had been nothing short of a rocket, but recent developments have sent shares spiraling downward. Health scares sparked a number of investigations at the state and federal level into the energy drink's role in several fatalities. With the company's value slashed in half, investors are wondering whether Monster Beverage is a value or a bust in the fast-growing energy drink category. Find out now in our brand-new premium research report, which details all the ins and outs you need to know about Monster Beverage. Click here now to claim your copy and start reading today.


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