Bargain hunters are buying shares of Monster Beverage (
MNST
) again, believing the $3.2 billion loss in market capitalization
value - more than 30% in two weeks - already discounts potential
legal and regulatory risks associated with the marketing of the
beverage maker's signature energy drinks. But trouble lurks
elsewhere, as rival challenges to its market share at home and
execution problems in new foreign markets will likely hurt
operating performance going forward as badly as any FDA probe
into health-safety issues. The most recent ugliness in this
stock chart
seems health-scare-related.
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Despite attempts to expand the scope and marketing reach of
its juice-based and natural soda brands - Peace Tea, Hansen's
Natural, and Blue Sky Sodas - the company remains a marginal
player in markets dominated by global players like Coca-Cola (
KO
), Dr Pepper Snapple Group (
DPS
), and PepsiCo (
PEP
).
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Caffeine drives the beating heart of this beast. Non-aseptic
energy drinks represented 92.5%, or $550.6 million, of net sales
for the second-quarter ended June 2012, up from 91.1% in the
prior year. Further, quarterly growth remains highly dependent on
continued consumer loyalty to the Monster Energy and Java Monster
brands.
Notwithstanding this product-branded dependence, chief
executive Rodney Sacks would have us believe that the company is
successfully thwarting competitive challenges. Using Nielsen
research data, Sacks told analysts on the second-quarter earnings
call that on a comparative basis, sales of Monster grew faster
than those of its top rivals Red Bull, Rockstar, 5-Hour, NOS,
Full Throttle (Coca-Cola) and Amp (PepsiCo). But - at what cost?
For the 52-weeks ending April, Chicago-based analytics firm
SymphonyIRI had privately-held Red Bull pegged the U.S.
caffeinated-king, with close to 40 percent market share and
nearly $2.8 billion in sales.
The $8 billion U.S. energy drink market is attracting new
competitors too. Kraft Foods Group (
KRFT
) entered the arena last year with its MiO drink and Starbucks (
SBUX
) is aggressively marketing its new green coffee extract infused
with fruit juices called Starbucks Refreshers. Even venerable
Campbell Soup (
CPB
) is muscling in on the action, expanding its V8 franchise with
V8 V-Fusion + Energy drinks and V8 Energy Shots.
Although Monster's net sales in the quarter grew by 28.2% to
$592.6 million, gross profit fell 100 basis points to 51.8% due
to a 31.9% increase in promotional allowances. Given the frenzied
elbowing for domestic share, gross margins at Monster in coming
quarters will likely decelerate further.
Although management will deny it, recent adverse publicity due
to the Food and Drug Administration launching an investigation
into five deaths allegedly tied to Monster Energy drinks means
the company will need to improve its "public image." Ergo, to get
in front of a public debate whose aim would be to restrict sales
of energy drinks to minors and/or regulate caffeinated-energy
drinks, look for Monster to increase the budgets for two line
items that fall under operating expenses: merchandise displays
and direct/advertising - pressuring net operating margins well
into next year.
MNST Operating Margin TTM
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Don't look to global markets to relieve the suffering. Yes,
net sales outside the United States are growing: Year-on-year
they climbed to $124.4 million, or 21% of total sales, up from
$78.1 million (17%) in the same period last year. Despite the
revenue gain, international markets negatively affected operating
losses in the latest quarter by $2.6 million, mostly due to
continued product delays in Brazil, Japan, and Korea.
Assuming it can regain its caffeine footing, Monster has the
financial resources to work through these headwinds. The balance
sheet is clean, with little long-term debt and $870 million in
cash and short-term investments. Purchase commitments and
contractual obligations are a manageable $156 million, too. And,
capital spending through June 2013 is likely to be no more than
$50 million, according to management.
Given existing health and safety-related problems, rumors of a
Coca-Cola takeover are no longer percolating. And, with the
troubled outlook ahead, consensus FY 2013 estimates of $2.45 per
share could be adjusted downward. Consequently, selling for only
20 times forward 12-month earnings could prove illusory - making
a bargain stock even cheaper in the months to come, based on
PE ratio
.
MNST PE Ratio TTM
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YCharts
David J. Phillips is a contributing editor at YCharts,
which includes the just-released
YCharts Pro Platinum
for professional investors.