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Monster Beverage (MNST) Down 5.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Monster Beverage (MNST). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Monster Beverage due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Monster Beverage's Q2 Earnings & Sales Miss

Monster Beverage reported lower-than-expected top and bottom-line numbers in second-quarter 2019. However, its earnings and sales improved on a year-over-year basis, driven by strength in the Monster Energy brand. Notably, this marked an earnings miss for the company after four straight quarters of reporting positive surprise. Meanwhile, its sales missed estimates after three consecutive beats.

Q2 Highlights

Monster Beverage’s earnings of 53 cents per share rose 11.9% year over year but missed the Zacks Consensus Estimate of 56 cents.

Net sales of $1,104 million improved 8.7% year over year but lagged the Zacks Consensus Estimate of $1,127 million. Moreover, gross sales (net of discounts and returns) rose 8% to $1,286.4 million.

The improvement in gross and net sales is attributed to robust sales growth for the Monster Energy brand’s energy drinks, both domestically and internationally, as well as strength in the Reign Total Body Fuel high-performance energy drinks that was launched in the first quarter. However, top-line growth was partly negated by unfavorable currency that hurt gross and net sales by $25.9 million and $30.7 million, respectively.

Additionally, net sales to customers outside the United States totaled $343.3 million, up 16.8% year over year. This represented about 31% of total sales in second-quarter 2019 compared with 29% in the year-ago quarter.

Segmental Performance

Monster Energy Drinks: Net sales at this segment rose 9.6% year over year to $1.02 billion. Robust gains from the sale of Monster Energy brand’s energy drinks and Reign Total Body Fuel high-performance drinks were partly offset by a negative impact of nearly $22.1 million from adverse currency rates.

Strategic Brands: This segment includes a range of energy drink brands acquired from The Coca-Cola Company (KO) in addition to its affordable energy brands. Net sales at this segment declined 0.8% to $79.1 million in the second quarter. Currency headwinds hurt the segment’s results by $3.8 million.

Other: Net sales at this segment, which includes some products of American Fruits & Flavors sold to independent third parties (AFF Third-Party Products), fell 12.1% year over year to $5.8 million.

Costs & Margins

The company’s second-quarter 2019 gross margin contracted 120 basis points (bps) to 59.9%. Gross margin was impacted by negative geographic and product sales mix as well as increase in some input costs. However, this was partly offset by gains from increased prices for products sold in the United States and Canada along with lower aluminum costs.

Operating expenses rose 7.5% year over year to $282.3 million. G&A expenses, as a percentage of sales, grew 20 bps to 10.9%. However, selling expenses, as a percentage of net sales, dipped 20 bps to 11.2%. Meanwhile, distribution costs, as a percentage of sales, declined 30 bps to 3.4%. Operating income of $379 million grew nearly 6% year over year. However, the operating margin contracted 90 bps to 34.3%, owing to soft gross margin and higher costs.

Other Financials

Monster Beverage ended the second quarter with cash and cash equivalents of $888.2 million, and total stockholders' equity of $4,057.6 million.

The company did not buy back shares during the second quarter. As of Aug 7, 2019, it had nearly $20.6 million and $500 million remaining to be bought back under share repurchase plans authorized in August 2018 and February 2019, respectively.

Strategies on Track

Monster Beverage is making significant progress in the implementation of its alignment with Coca-Cola Bottlers globally. In April 2019, the company transitioned the distribution of Monster Energy drinks from Big Geyser’s territory (comprising the New York metro markets) to Liberty Coca-Cola. This marked the completion of transition to Coca-Cola system bottlers in the United States. In second-quarter 2019, the Coca-Cola bottlers launched Monster Energy drinks in Azerbaijan, Paraguay and Saudi Arabia. Further, Monster Beverage is on track with the transitioning of the Monster Energy brand to Coca-Cola system bottlers in more countries.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Monster Beverage has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Monster Beverage has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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