Please ensure Javascript is enabled for purposes of website accessibility

Is the Aluminum Shortage Hurting Monster Beverage?

By Anders Bylund - May 8, 2021 at 10:11AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The beverage industry is battling aluminum can shortages. Here's what that means for the leading maker of energy drinks.

Energy-drink giant Monster Beverage (MNST 0.81%) reported first-quarter earnings on Thursday, May 6. The results were roughly in line with Wall Street's expectations, but that felt like a letdown for a company that usually trounces analyst targets across the board. Market makers certainly took it that way, pushing Monster's shares 5% lower on Friday.

A global shortage of aluminum cans played a role in limiting Monster's financial results, but exactly how big of a difference did this industrywide issue really make? Let's have a look.

Young businessman in blue suit sitting at desk in office with coin stacks on the desk.

Image source: Getty Images.

What's going on?

Monster's net sales rose 17% year over year in the first quarter, landing at $1.24 billion. Your average analyst would have settled for $1.22 billion. Bottom-line earnings increased by 14% to $0.59 per diluted share. Here, the Street view called for $0.61 per share. Given that Monster doesn't give analysts official guidance targets to work with, I think it's fair to say that this report was broadly in line with expectations.

Management pointed out that aluminum shortages weighed on Monster's operations in North America and Europe. That's a result of the COVID-19 pandemic, which has limited mining operations around the world and wreaked havoc on the supply and-demand situation on a country-by-country basis. The quicker a region is coming back from last year's coronavirus recession, the harder it is to find aluminum at reasonable prices. On the earnings call, co-CEO Hilton Schlosberg said that aluminum prices are up 84% in the U.S. and 71% in Europe, compared to the year-ago period.

The metal is needed for infrastructure construction projects, for the recovery of the auto industry, and for a million other uses that drive aluminum prices higher. Even the true giants of the beverage industry are fighting this issue. Monster's global distribution partner Coca-Cola (KO 0.76%), for example, closed down the production of less popular drink flavors last summer because of a lack of aluminum cans, and some of the missing flavors may not come back.

What is Monster doing about it?

Monster is working around the North American and European shortages by importing aluminum cans from places like South America and Asia, where aluminum shortages are less pronounced. Therefore, the aluminum problem isn't limiting Monster's sales in any meaningful way. Net sales in the Europe, Middle East, and Africa region (EMEA) actually rose 28% in the first quarter, outpacing Monster's global growth. The cross-shipping of extra supplies did add to the company's operating costs, slicing EMEA's gross profit margins from 41.3% to 37.3%.

Schlosberg doesn't expect the higher costs to go away anytime soon.

"I expect that our margins will not improve as we go into the second, third, quarter," he said. "Possibly the fourth quarter, I think things will be better. That's my analysis."

Until then, Monster's gross margins will continue to suffer from high aluminum prices and additional costs related to the company's workarounds.

Photo of a Monster Energy can, resting on a bed of ice cubes.

Image source: Anders Bylund.

What's next?

By and large, Monster is going ahead with the same global growth plan that the company would have in a world with easy access to cheap aluminum cans. It's more important to grow the market -- and Monster's share of that market -- than it is to protect profit margins. Management is thinking about raising unit prices, as arch-rival Red Bull has done, but Monster may simply bite the bullet and rough it out for a few quarters.

So the road ahead may be a bit bumpy on the bottom line as the company focuses on growing its worldwide market reach. And don't worry about Monster's shareholders. The stock trades just 8% below mid-April's all-time highs at a generous valuation of 34 times trailing earnings and 10 times trailing sales. The aluminum issue is not a game-changing growth problem but a minor profit-related inconvenience.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Monster Beverage Corporation Stock Quote
Monster Beverage Corporation
$90.02 (0.81%) $0.72
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$63.70 (0.76%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.