So what: The company has basked in the afterglow of its distribution deal with Coca-Cola Company (NYSE:KO) since last year, when the transaction was announced. Under the terms of this partnership, which was finally concluded in June, Monster handed over its non-energy drink brands, including Hansen's Natural Sodas, Peace Tea, and Hubert's Lemonade, to Coca-Cola, in exchange for Coke's energy drink line, which features names such as NOS, Full Throttle, Burn, and Relentless.
July turned about to be a pretty decent month for beverage companies across the board. After both Coca-Cola and Dr Pepper Snapple Group reported solid earnings in the third week of July, investors began bidding up shares of Monster in earnest, ahead of its August 6 reporting date:
Monster's own earnings when released reflected the transformation of its business as it scales into Coke's global distribution system. The company reported a 62.4% increase in net income during the second quarter, but this was largely due to a $161.5 million gain associated with the transfer of its non-energy drink business to Coke. More pertinently, net sales improved by only 1%, to $693.7 million, as the company underwent growing pains in migrating its distribution from previous supply chain partners to Coca-Cola.
Per analysis provided by Monster with its earnings release, in the first half of the year, the combined effect of accelerated deferred revenue recognition (positive $39.8 million), distribution termination and transaction costs (negative $233 million), and the nearly $162 million gain discussed above has resulted in a total drag from the transaction on net operating income of just $32 million.
The realization that the operating effects of the Coke deal so far aren't enormous, coupled with CEO Rodney Sack's earnings release statement that the company has already transitioned 89% of domestic distribution rights to Coke, provided an offsetting narrative to the lack of revenue growth. As if in relief, Monster stock gained nearly 3% the day after its earnings release.
Now what: Looking ahead to the second half of 2015, investors will want to keep their eyes on Monster's continuing transition into global markets within the Coca-Cola distribution system, a process that won't be nearly as smooth or quick as the domestic changeover. In particular, the next couple of quarters should begin to throw into relief the balance between international revenue growth and the currency effects of a strong U.S. dollar, as Monster begins to sell a greater percentage of its portfolio overseas. And hopefully for shareholders, the most complex parts of the Coke transaction are now completed, making top-line growth -- not to mention comparisons with prior quarters -- a bit easier.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Monster Beverage. The Motley Fool owns shares of Monster Beverage and has the following options on Coca-Cola: long January 2016 $37 calls, short January 2016 $43 calls, and short January 2016 $37 puts. 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.