Monster Beverage Corporation (NASDAQ:MNST) reported first-quarter results last Thursday. While its once-blistering sales growth has cooled off in recent years, the company keeps finding ways to energize its bottom line.
Revenue was up 10.7% to $536.1 million for the quarter ended March 31, but earnings per share went absolutely gangbusters, rocketing 49% higher to $0.55, handily beating Wall Street's $0.49 estimate. Let's take a look at the factors that allowed Monster to work its magic and what its report means for the future of the company.
A top-down look at Monster's business
Investors can't expect to outperform the market without understanding something about the macro forces at hand. When zooming out from Monster's quarterly results to look at the beverages industry, larger trends become apparent. For instance, according to Beverage Digest, U.S. sales volume for carbonated soft drinks fell for a ninth straight year in 2013. The rate of the decline is also increasing: Volume dipped 1% in 2011, 1.2% in 2012, and 3% in 2013. Yikes.
But there was a lone subsegment of the soft drink market showing promise: energy drinks.
An industry facing headwinds
While the trend above is probably compelling enough to convince us that the U.S. is losing its taste for carbonated drinks, it doesn't answer a more important question: Why is this happening?
SodaStream isn't doing the industry any favors. The company's namesake product allows consumers to brew their own soft drinks at home, appealing to the environmental benefits of brewing soda in the kitchen. According to SodaStream's website, it's "saved the world" from over 4 billion bottles. And according to its financials, it's becoming a force to be reckoned with, with sales of $562 million in 2013.
But the more potent force behind fizz's recent funk stems from health concerns. The last decade birthed the natural-food revolution, a revolution that's spilled out into the streets of the beverage industry with protein shakes and juice diets. With First Lady Michelle Obama taking aim at childhood obesity and New York City's attempts to ban jumbo sodas in the Big Apple, the industry is under attack.
Critics also claim energy drinks pose a unique health risk because of their popularity with young consumers, who are prone to overconsumption. Caffeine levels in particular have come under fire because caffeine's not only addictive but it can have negative long-term health effects on daily users.
Monster addressed the health concerns in its conference call on Thursday by reiterating the safety of its products and taking a swing at Starbucks (NASDAQ:SBUX) in the process. CEO Rodney Sacks asserted that a 16-ounce Starbucks coffee contains roughly 330 milligrams of caffeine, more than twice the amount in a 16-ounce Monster energy drink.
Why the low blow to Starbucks?
Starbucks, more so than your local coffee shop, competes directly with Monster. The companies actually fight each other for shelf space, with Starbucks not only selling bottled coffee but also its own line of canned energy drinks.
The growth of energy drinks in the carbonated beverages segment is starting to garner more attention from the "big boys" in the industry. The biggest boy of all, Coca-Cola (NYSE:KO) -- which already sells Full Throttle energy drinks and licenses out its NOS energy drink -- boldly introduced another energy concoction just last month under its vitaminwater brand.
Red Bull, however, remains Monster's closest competitor, and in most major markets, the brands hold the top two spots in terms of market share.
Despite increasing competition, Sacks cited Nielsen market share statistics from April that show Monster's share of the U.S. convenience and gas channel rose 2.1% from the year before to 35.4%. Red Bull lost ground, finishing at 34.5%.
Monster's market share also grew in a handful of important markets internationally, ticking higher in Mexico, Canada, eight countries in Europe, and South Africa.
The company has ambitious expansion plans, rushing to claim overseas markets before companies like Coca-Cola use their distribution networks to muscle their way in. You know what they say: "The sun never sets on Coke's distribution network." Monster doesn't want the sun to set on it, either, so it's building out production facilities in major markets like Japan, parts of mainland Asia, South Africa, and India. Localized production in overseas markets should boost long-term margins as freight costs and charges for damaged goods fall.
Changes in Monster's product mix helped to boost margins. Sales of its Ultra energy drink took off, and due to Ultra's lower production costs, margins shot higher. Gross margins last quarter increased 1.4% year over year to 53.5%, while net margins, aided by a lower tax rate and falling SG&A costs, jumped 4.7% from the year-ago period to 17.8%.
On top of that, the company's financials still look exceptional, as Monster holds no long-term debt, and cash on hand jumped more than $100 million in a single quarter to $312 million.
With expanding margins, increasing share in key markets, and production facilities overseas primed to establish the company's foothold abroad, there wasn't much to dislike about Monster's first quarter. While sales aren't growing at the 20% to 30% clip of yesteryear, neither is the energy drink industry. Monster is best-in-class in the U.S. energy drink market, growing sales faster than industry averages, but that can't last forever, and international growth is the real long-term opportunity. With the U.S. market approaching maturity, the company needs to prove itself overseas before shareholders can count on market-beating returns from this stock.
Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.
The Motley Fool recommends Coca-Cola, Monster Beverage, SodaStream, and Starbucks. The Motley Fool owns shares of Monster Beverage, SodaStream, and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.