Monster Beverage Corporation (NASDAQ:MNST) shares are down over 9% year-to-date. Does the company need a shot from one of its own energy drinks?
Our Industry Focus: Consumer Goods team takes a fresh look at this constituent of the Consumer Staples Select Sector Fund and discusses the beverage company's long-term prospects.
A full transcript follows the video.
This podcast was recorded on Nov. 29, 2016.
Vincent Shen: Another way I wanted to look at these funds and how investors can view them, not just buying into the XLY or the XLP directly, but to look at their holdings and get some ideas for companies in these sectors or subsectors that you might not be as familiar with.
That's what I want to dive into now with two companies that we haven't spoken about in a long time on this Consumer Goods series of Industry Focus. The first one is Monster Beverage Corporation. They're down about 9% year to date. They are a member of the XLP. I think, recently, the big news for this company has been the partnership they've made with Coca-Cola. They have started to make more and more of a transition to Coca-Cola's distribution system, so they've really been able to expand worldwide. They recently made it into markets like Mexico, Chile, Brazil, South Africa, and also China -- they launched in Beijing, Shanghai, the past couple months. What do you think about Monster Beverage and some of the adjustments they're making as they make this international expansion?
Asit Sharma: The Coca-Cola deal was very beneficial to Monster, as you pointed out, they've really expanded their global footprint. At the same time, Monster is falling victim to forces that the other beverage companies and sectors are being hit by. One of those is soda taxes. That's something that you and I have talked about on this show before, Vince. It seemed like Monster was a fast-growing entity, and this is the first time in the last few quarters where we've seen a bit of investor skepticism that this might hurt Monster as well. Even though it is an energy drink business, it has a lot of sugar in its products.
Again, what happens if you're holding consumer discretionary income, and a soda tax hits in your municipalities? We have seen this in Berkeley and some other cities. Then you might be less inclined to buy soft drinks and energy drinks. So, it's sort of a headwind on the stock, which is very germane to the theme we've been talking about today. However, I do like Monster because its particular part of the beverage world, the energy drink business, is growing at about 3.5% compounded annual growth rate every year. Now, that doesn't sound like a huge amount, but if you compare it to a flat or negative growth rate for soda, it has more of an addressable market that it can tap into, and it has every potential to resume its fast growth that we've seen in years past.
Shen: Absolutely. I think it's important to note, you mentioned taxes and some of the other regulatory pressure that some of the beverage companies and some of the other companies in the space are seeing. But ultimately, even if that results in some greater expenses as they try to fight some of that, overall, this company has very strong financials. They have significant cash flows with an equally strong balance sheet. I think they have something like $600 million in cash and short-term investments, and that's with no debt. They've repurchased about $2 billion of shares just in 2016, that's really helping to juice their EPS (earnings per share) growth. Their profit margins, as a result of their expansion, their partnership with Coca-Cola becoming more efficient, both their gross and net margins have managed to grow quite steadily over the past year or two. This is definitely one where, with that footprint growing, with China, and they're also soon going to be breaking into other major markets within Latin America, Central Asia, the Middle East and Africa, it's a very interesting company to watch, for sure.