A month has gone by since the last earnings report for Monster Beverage (MNST). Shares have lost about 14.7% 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 Q4 Earnings & Sales Beat Estimates
Monster Beverage reported solid fourth-quarter 2018 results, wherein the top and bottom lines outpaced the Zacks Consensus Estimate and improved year over year. Notably, this marked the third straight positive earnings surprise with second consecutive sales beat.
Monster Beverage’s earnings came in at 43 cents per share, up 22.7% year over year and surpassed the Zacks Consensus Estimate of 40 cents.
Net sales of $924.2 million grew 14.1% year over year and exceeded the consensus mark of $895.8 million. Also, gross sales improved 13.7% to $1.06 billion in the quarter under review.
However, net and gross sales were hurt by $16 million and $18 million, respectively, due to advance purchases by customers in the previous quarter. A pre-announced price hike from Nov 1 on certain Monster Energy drinks led to advance purchases. Net sales were also adversely impacted by $14.4 million from foreign currency translations and by $8.5 million from the adoption of Accounting Standards Codification (“ASC”) 606. Excluding the adoption of ASC 606, the top line grew 15.1% in the fourth quarter.
Outside the United States, net sales to customers totaled $274.3 million, up 30.4% year over year.
Monster Energy Drinks: Net sales at this segment, which includes Monster Energy drinks, increased 15.9% from the year-ago quarter figure to $853.3 million. Nonetheless, the metric was hurt by $3.2 million due to the adoption of ASC 606 and $12.4 million from adverse foreign currency rates.
Strategic Brands: This segment includes a range of energy drink brands acquired from Coca-Cola. Net sales at this segment declined 5.4% to $65.8 million in the fourth quarter. The downside can be primarily attributed to adverse impact from the adoption of ASC 606 and foreign currency.
Other: Net sales at this segment, which includes some products of American Fruits & Flavors sold to independent third parties, grew 8.5% year over year to $5.1 million.
Costs & Margins
Fourth-quarter 2018 gross margin contracted 240 basis points (bps) to 59.7%. The decline can be attributed to higher certain input costs like aluminum cans, freight and other input costs; lower net sales due to the adoption of ASC 606; geographical mix; and domestic product sales mix. This was somewhat mitigated by rise in domestic sales prices coupled with lower promotional allowances as a percentage of gross sales.
Operating expenses, including $14.1 million of distributor termination expenses, increased 3.8% year over year to $245.7 million. However, selling expenses, as a percentage of net sales, were 11.3%, down 230 bps from fourth-quarter 2017 figure.
Operating income amounted to $306.5 million, up about 14.8% year over year. Also, operating margin expanded 20 bps to 33.2%.
Monster Beverage ended the fourth quarter with cash and cash equivalents of $637.5 million, and total stockholders' equity of $3,610.9 million.
Effective tax rate in the quarter was 23.1% compared with 24.8% in the prior-year quarter.
Moreover, the company bought back shares about 9.4 million shares worth $536.9 million (excluding broker commissions) in the reported quarter. It had an outstanding authorization to buyback shares worth nearly $20.6 million as of Feb 26, 2019, under its August 2018 repurchase plan. On the same day, the board also authorized a new repurchase program of up to an additional $500 million.
Monster Beverage remains confident about its performance, reporting record net sales for the fourth quarter as well as the full year. This was fueled by the company’s strategic initiatives and brand strength, Monster Energy brand drinks in particular. Moreover, the company is well on track with its strategic alignment with Coca-Cola system bottlers.
Furthermore, management remains committed toward product launches to boost growth. Apparently, Monster Beverage is on track to launch Monster Energy Ultra Paradise and Java Monster Swiss Chocolate in the United States. Also, the company intends to roll out the Reign Total Body Fuel line of performance energy drinks along with the Monster Dragon Tea line this March. Notably, the company’s one or more energy drinks are being distributed in roughly 155 countries and territories globally.
Monster Beverage will continue to roll out the Monster Energy brand in other geographical markets this year. Apart from these, it plans to launch Predator energy brand in various markets internationally.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Monster Beverage has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Monster Beverage has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.