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Supply chain issues ‘will get better’ for Monster Beverage, analyst says

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Stifel Analyst Mark Astrachan joins Yahoo Finance Live to discuss why he's bullish on Freshpet, Estée Lauder and Monster Beverage as well as breakdown the state of consumer staples amid the pandemic.

Video Transcript

BRIAN SOZZI: Procter & Gamble's quarterly results out on Tuesday will officially kick off earnings season for consumer goods companies. But with inflation hammering the space, should you be playing any of these names into their earnings reports? Mark Astrachan is an analyst at Stifel and covers the sector. Mark, good to see you this morning. Let's start with P&G results out tomorrow morning, I think. We were talking about this earlier in the show. I think investors have forgotten about how much inflation is impacting this company. How concerned are you about P&G's report?

MARK ASTRACHAN: It's all relative, frankly. You know, we're going to hear more tomorrow morning about pricing and obviously input costs. I think everybody generally understands the gross margins. Our pressure to have been pressured will continue to be pressured. The question is just how much less the pressure will be as we move through this fiscal year, which started on July 1?

So they've talked about pricing actions that they've taken. I think we're probably going to hear about some more tomorrow. We're having a pretty steady stream of other companies talking about taking pricing. So and generally, going to be pretty consistent with kind of people's views there. And as you said, I think people really more are questioning kind of when you trough from a gross margin standpoint. People are kind of looking to the future here. Nobody-- nobody really understands or doesn't understand that you're not seeing pricing go up. So the question is just-- just when do you peak?

JULIE HYMAN: And Mark, it's Julie here. We keep talking about supply chain issues for almost everything. What indications have we gotten from P&G thus far about whether they're able to get product where it needs to be?

MARK ASTRACHAN: Procter has actually done an amazingly good job. They were talking about this on their last earnings call, and there seem to be in a pretty good spot there in terms of getting product to consumer, I suppose. Since then, we heard from Costco a few weeks ago about rationing purchases of toilet paper and diapers and things like that, so and perhaps we'll hear a little bit more out of Procter in terms of some supply chain issues, although, interestingly just given how interconnected the world is.

Some of it is not necessarily related to them getting the product to the retailer or getting the product or the wholesale. We're getting the product even out of their warehouses. Basically, getting enough of the stuff to go into the finished goods. So you know, bringing things all over the world. So maybe we hear a little bit about that. But I do think Procter is probably going to end up being in much better shape than most.

BRIAN CHEUNG: Hey, Mark. Brian Cheung here. I want to ask and just kind of pivot here to kind of food and consumable goods here. Monster is something that's been on your radar. And I had an energy drink for like the first time in a few months last week, I thought I was going to die. But what do you see in terms of the demand for energy drinks in this recovery right now? Do you feel like supply chain issues can kind of hold back the likes of Monster in this earnings season?

MARK ASTRACHAN: Yeah. Well, you seem to be in the minority, I suppose, based on what energy drink sales are doing these days. This category in the US is 20 plus years old and still growing mid-teens, which is kind of amazing to think about. I feel like I had a discussion about this being a short term fad 15 years ago, and here we are. So you know, people are drinking more and more energy drinks not just in the US but on a global basis, and your comment on the supply chain if you listen to any Monster earnings calls over the last couple of quarters, they basically talked about not having enough cans to meet demand. And so I suppose that's a good problem.

But on the other hand, if you're looking for one and you can't find your favorite flavor, you may move on to another-- another brand within that cooler. So at some point, it's going to get better. But, if you take a look at aluminum prices, you take a look at production capabilities for cans, right now, you're still in a situation where you just can't produce enough in terms of the actual cans to put the liquid in there to get the product to shelf. I think most of the rest of the supply chain is fine.

But, the can issue probably continues at least for another quarter or two here. I guess the good news is you get to lap all of that next year. So assuming demand remains robust, they get good-- good demand and they get more cans next year, which should help the overall sales growth. But, a good problem to have, I suppose.

BRIAN SOZZI: Mark, drink enough Monster and you'll break out all over your face probably in need some makeup. You cover Estee Lauder here. Why is that stock not come back? We have seen makeup sales improve really over the past three months. What's going on here?

MARK ASTRACHAN: I'm still trying to process that change from--

BRIAN SOZZI: Lots going on here at Yahoo Finance, Mark, this is not your standard business show.

[LAUGHTER]

MARK ASTRACHAN: Well, water is an interesting one. As you said, beauty trends in general, have come back from where we were kind of 18, 16 months ago. But it's a global business too. Really what drives Estee Lauder and some of its big global peers is what's going on in China in particular. Pre-pandemic, it was a lot about the Chinese getting on planes and traveling all over the world and buying product. You know, you can do a lot less of that these days and the Chinese government has actually done a really good job of capturing a lot of that local demand domestically by increasing a lot of duty-free capabilities within existing locations and cities in China, but also creating a really big, robust duty-free zone and an Island to their South.

And so you're still seeing a ton of Chinese demand for beauty products traveling pretty much all over the country as allowed for whatever is going on from a lockdown down or non-lockdown standpoint there. And that really is what's driving overall beauty consumption here. You have China, which is, depending on whether you want to travel retail piece, probably decently north of 20% of the business at this point growing strong double digits. So that can take care an awful lot of slowing growth in other places like Europe, which is still been a bit more impacted by what's going on in the world.

North America has actually come back quite nicely. Stimulus-driven probably, to some extent, has become out of this, but we've seen a good improvement there. I actually do think this quarter, when they give results in a couple of weeks, we'll see the effect actually starting to improve here after kind of 16 months of being a bit slower.

BRIAN SOZZI: And one of your top picks, Mark, is Freshpet. What's the 30-second pitch here?

MARK ASTRACHAN: People have adopted a lot of pet dogs and cats over the last 18 months. You have a lot of younger consumers millennials, Gen Zs, then they're looking to feed them as they would eat themselves, which is better for your higher grade pet food. Put it in the fridge next to your own food and you treat-- you treat your dog or cat like you would treat them as your kid, and that's a good thing for Freshpet.

BRIAN SOZZI: All right. Well, we'll leave it there. Mark Astrachan, analyst at Stifel. Happy earnings season. Hope you survive the week. We'll talk to you soon.