Energy-drink expert Monster Beverage (NASDAQ:MNST) reported third-quarter results last week. With 15% year-over-year earnings growth and 11% higher sales, the company edged out Wall Street's estimates across the board. The stock jumped as much as 8.6% higher the next day before calming down to a 2.7% gain at the ringing of the closing bell.
Those are the headline figures you'll see all over the place. Let's take a closer look at Monster's quarterly report and earnings call, where we're likely to find the real meat of this market-moving event. Going that extra mile helps you separate truly great companies from lesser wannabes.
1. International expansion
The company moved its energy drinks to Coca-Cola's (NYSE:KO) global bottling and distribution network in three new markets during the third quarter, namely Honduras, El Salvador, and the Dominican Republic. More territories will follow in the fourth quarter and beyond. The lower-priced Predator drink launched in Slovakia and Botswana with more Eastern European and African territories to follow. The Chinese product portfolio was expanded by two flavors, and Sweden got its first shipment of Reign Total Body Fuel.
In other words, Monster is putting its back into a global expansion strategy. This makes perfect sense, because the lion's share of Monster's business takes place in a fairly saturated domestic market.
The U.S. and Canada accounted for 69% of total third-quarter sales, compared with 75% in the year-ago period. Monster got there by expanding sales by more than 40% year over year in the Asian and Latin American segments, posting 34% revenue growth in the Europe, Middle East, and Africa division, and notching a modest 3% increase in the domestic market.
On the eve of this report, Monster's board of directors added $500 million to the company's share buyback policy. Using up the full amount would retire approximately 1.6% of Monster's total share count at current prices. It would also consume roughly 46% of the company's annual free cash flows.
That might sound like a lot, and I do agree that we're looking at a significant shareholder-friendly investment here. But it's not a very large commitment in the context of Monster's buyback history.
Monster Energy has invested $393 million in net share repurchases in 2019, which was a large step down from $1.3 billion in 2018. The company took it relatively easy with a $308 million buyback budget in 2017, but 2016 saw a $2.2 billion splurge.
The company has returned billions of dollars to shareholders in the form of buybacks in recent years, and that policy continues today. So a $500 bump in the budget is nice, widely expected, and nothing unusual.
3. Lawsuits and Monster cannibalism
Last year, Monster Beverage's drinks combined for a 38% share of the domestic energy drink market. Privately held Vital Pharma quintupled its sales of a workout-boosting energy drink named Bang in 2018 but was still sent home with just a 1.9% slice of the market. Monster saw this fast-growing challenger as a threat and quickly released its own take on Vital Pharma's concept of energy drinks for workout sessions. That product, Reign Total Body Fuel, held a 3% market share in the third quarter, having launched as recently as the first quarter of 2019.
On the earnings call, Monster CEO Rodney Sacks reported that Monster sales fell 5% year over year, losing revenue to Bang and its own Reign drink.
"Monster's share [in the third quarter] decreased 4.1 share points to 33.5% and Reign's share was 3%," Sacks said. "Bang's share increased 4.2 points to 8.2%."
So a competitor inspired Monster to launch a new type of product, which is doing well but still collects lower revenues than the third-party original. Workout-related energy drinks are reshaping Monster's product mix both from external sources and Reign cannibalizing the larger Monster brand.
Monster and Vital Pharma are battling each other in court, where Vital Pharma claims the larger rival's Reign product infringes on its trademark rights. Monster, in turn, argues that the Bang drink is being promoted by false advertising claims. Both lawsuits are ongoing, and Vital Pharma wants to up the stakes by introducing a new drink using Monster's Reign brand.
Things are getting heated over here. Bang vs. Reign is a high-stakes battle with serious money on the line, and any settlement or final verdict in the related lawsuits could decide the outcome of that fight in a hurry. There was no game-changing news on that front in the third quarter, but Monster Beverage investors need to keep an eye on this rivalry.