Monster Beverage (NASDAQ:MNST) will report its third-quarter earnings after the closing bell on Thursday. The energy drink company does not offer quarterly guidance, but Wall Street expects Monster to come through with earnings of $0.66 per share on $642.7 million in revenue, which works out to anticipated year-over-year growth rates of 24.5% on the bottom line and 8.9% on the top line.
Dedicated Monster investors might be looking for better numbers, however, in light of the company's blockbuster $2.15 billion to sell a nearly 17% stake in the business to with soft-drink kingpin Coca-Cola (NYSE:KO), which was announced during the third quarter. The true impact of this deal won't be known on Thursday, and it might not be known until well into 2015, but it certainly sees to be a long-term game changer for Monster. What else should investors look for when Monster reports the quarterly numbers? Let's dig into the details.
What will management have to say about Monster's deal with Coke?
If you're not familiar with Monster's deal with Coke, now's the time to familiarize yourself -- click here to read an excellent analysis of the deal by Fool analyst David Kretzmann. The gist of this deal is that Monster will become a more globally diversified pure-play energy-drink company, transferring its nonenergy-drink brands to Coca-Cola in exchange for Coke's current energy-drink portfolio and an expanded distribution arrangement, That is on top of the $2.15 billion Coke invested for a sizable minority stake in Monster.
We might not see much (or any) of this in Monster's third-quarter earnings, but you can be sure that it will be a hot topic during the company's earnings call, and management will probably be eager to crow about its pending Coke-backed plans for world domination. The deal won't be the key to Monster's third-quarter results, but it's so important to the company's long-term plans that any further information might well be the driving force on Monster's share price for the rest of the year.
How much faster will Monster's bottom line grow than its top line?
No surprise for a maturing business, Monster has seen its top-line growth dwindle from consistently strong double-digit year-over-year revenue growth in the early part of the decade to high single-digit growth for most of the past few quarters. For a while, it seemed Monster was running into a problem faced by many maturing businesses, as it couldn't sustain EPS growth rates above its top-line growth rates for very long, but things have been looking up in 2014:
Monster's EPS grew at far higher rates for the first two quarters of 2014 than it has in years, and analysts expect this trend to continue into the third quarter. Some of this is undoubtedly due to the periods against which these quarters are compared -- the first quarter of 2013 saw Monster's only year-over-year EPS decline in this decade, and the second-weakest quarter of the decade came immediately afterward. But a good part of Monster's strengthened earnings can also be explained by better pricing power, as its sales price per 192-ounce equivalent case rose to its highest mark of this decade in the second quarter. That $10.49-per-case sales price translated into decade-high operating margins, which translated in a fairly straightforward way to record-high net margins:
The company had not seen four consecutive quarters of strengthening case sales prices in this decade until the streak began in mid-2013; however, this progress could reverse itself in the third quarter, to investors' disappointment. However, Monster's deal with Coke has undoubtedly given it a stronger hand on the distribution side, and this could well translate into consistently higher case sales prices -- and thus higher margins. As we've already discussed, the Coke deal probably won't show up on the earnings statement for the third quarter, but case sales prices are something to keep an eye on going forward, to see if Coke's backing can help Monster lock in better deals with its major customers.
How well will Monster do internationally?
Monster doesn't report its international sales on initial 8-K earnings reports, but it does offer some detail on both its conference call and its official 10-Q and 10-K filings. About 23% of its gross sales were to international customers in the first half of 2014, a share unchanged from the first half of 2013. Going back further, we can see a gradual increase in international sales over the past few years:
- 2014 first half: 23%
- 2013 first half: 23%
- 2012 first half: 21%
- 2011 first half: 19%
- 2010 first half: 15%
- 2009 first half: 12%
International sales have nearly doubled as a share of Monster's revenue over the past six years, and its deal with Coke promises to greatly expand the company's international reach. Presentation slides offered as part of that deal indicate it will expand Monster's international revenue to account for roughly 5% more of its total revenue. Investors should keep an eye on Monster's international revenue figures with mental calculator at the ready. If international revenues account for 25% of revenue in the third quarter, they may well be worth 30% (or more) of Monster's revenue in the third quarter of 2015.
What will you be watching when Monster reports its third-quarter earnings on Thursday?