Will Monster Beverage Have Enough Energy for 2017?

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Few companies can claim better long-term success stories than Monster Beverage. The company has created an energy-drink empire from scratch, attracting the attention of major beverage giants.

In the last six months, shares of Monster Beverage are down 20%, Monster Beverage investors wanted the beverage maker to prove that it could still grow its bottom line at an impressive rate.

Monster’s results were far from bad, but they nevertheless didn’t live up to the growth expectations that investors had for it. Let’s take a closer look at how Monster Beverage did and whether better times could be ahead.

PROMOTIONAL ACTIVITY IS A KEY PART OF MONSTER’S BRAND-BUILDING. IMAGE SOURCE: MONSTER BEVERAGE.

Monster Beverage needs a recharge

Monster Beverage’s third-quarter results in 2016 didn’t have the energy that investors have come to expect from the company. Revenue was up just 4%, to $788 million, which was well short of the consensus forecast among those following the stock, for roughly $820 million. Net income rose a more respectable 10%, to $191.6 million, and that produced earnings of $0.99 per share. However, that number didn’t compare favorably with investor expectations of $1.12 per share.

Monster said that sales outside the U.S. made up $190.8 million in revenue, up by almost an eighth compared to year-ago figures.

From a segment-by-segment perspective, Monster saw modest strength across the board. The Monster Energy drinks segment, which also includes the Mutant Super Soda product, saw revenue climb to 3.4%. Meanwhile, the strategic brands segment, which includes formerCoca-Colaenergy-drink brands, posted sales gains of 3.2%. Moreover, the new segment for other revenue posted sales of $5.7 million, representing sales of products of American Fruits & Flavors that are sold to independent third parties.

Operationally, Monster fared reasonably well. Gross profit margin climbed strongly, but a rise in general and administrative expenses hurt the company’s operating income. The company’s tax rate fell sharply during the period, reflecting a one-time tax benefit. Case volumes climbed slightly, to 82.8 million cases, and average net sales per case climbed to $9.45.

Growth strategy

To improve sales, Monster Beverage is trying to increase its household penetration. At its investor conference in January 2017, vice chairman and president Hilton Schlosberg said that low household penetration, particularly among the older demographic, is a challenge.

The company is trying to address this challenge through aggressive marketing and promotional activities. That includes the company’s sponsorship of professional golfer Tiger Woods and a multiyear partnership with NASCAR (National Association for Stock Car Auto Racing).

The company is also looking at the innovation of new variants. In September 2016, it launched Mutant, which it calls a super soda. Mutant, introduced in the US market, is positioned to compete with PepsiCo’s (PEP) Mountain Dew. The company is also geared up to launch Hydro, a noncarbonated drink with 100 calories per 500 ml (milliliters).

What’s ahead for Monster?

Monster Beverage CEO Rodney Sacks once again made most of his comments about internal operations, especially its strategic alignment with various Coca-Cola bottlers internationally. “We commenced the launch of Monster Energy drinks in China,” Sacks said, “beginning with Beijing in September 2016 and Shanghai and Hunan Province in October 2016.” The CEO believes that Monster will keep making moves for the rest of the year and throughout 2017 to boost its presence in China. In addition, distribution in the U.S. market has seen improved quality, and the Mutant Super Soda is doing well early on in its product cycle.

One thing that investors will want to watch closely is a pick-up in costs related to regulatory matters and litigation. For now, the $4.9 million that Monster spent in the third quarter 2016 isn’t worthy of too much concern, but it did rise by nearly half from year-ago levels. With the beverage industry broadly seeing more attention from regulators and consumer advocates, Monster will have to work hard to control risk.

Investors in Monster Beverage weren’t pleased with the slowdown in the company’s growth rate, sending the stock down about 5.5% in after-hours trading following the announcement. In order to make long-term investors more comfortable with the stock, Monster will have to find ways to stoke its growth and get things moving more aggressively in the right direction.

Source: The Motley Fool & Market Realist

By Dan Caplinger & Sharon Bailey

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