What Monster's Woes Mean for Other Drink Makers
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Monster's (NASDAQ: MNST) share price shrank after its latest earnings report as the energy drink maker reported weaker margins and lower earnings growth than expected. Several other major companies sell beverages that can provide an energy boost, including Coca-Cola (NYSE: KO), Pepsi (NYSE: PEP) and Starbucks (NASDAQ: SBUX), and could mean trouble for other beverage sellers. I checked each factor that played a part in Monster's sell-off to consider the implications for other drink companies.
Monster's earnings call, shows that the company's international sales are still rising rapidly, as Monster earned about 50 percent more revenue from international sales in 2Q 2012 than it earned in 2Q 2011. These results seem to support the theory that Monster has strong international growth prospects, although relying on international sales does make Monster somewhat vulnerable to currency fluctuations. Currency fluctuations, specifically dollar strength, did drag down Monster's results this quarter. Coca-Cola, Pepsi, and Starbucks both have extensive international operations.
Monster also has to deal with a state investigation into whether its energy drinks are safe, according to Reuters, which was another factor that lowered its stock price. Although Coca-Cola probably isn't as vulnerable here (because a ruling against energy drinks might not affect its main beverages), a ruling against Monster would affect Coca-Cola to some extent because of Full Throttle. Pepsi could also receive a penalty because of Amp, so it should also pay attention to this case. Starbucks also sells coffee drinks that contain lots of caffeine, although a ruling against energy drinks might not affect coffee, and former energy drink buyers might even switch to coffee to keep getting a caffeine rush.
Currency fluctuations don't seem to be the only factor that could have reduced beverage companies' margins recently, as many companies reported weaker sales in the last few months and the ongoing drought puts pressure on supply costs. Corn crops were hit particularly hard by the drought, and Monster, Coca-Cola and Pepsi all need to buy lots of high fructose corn syrup to brew their drinks. Starbucks seems like it might not be as vulnerable to rising corn prices because arabica beans are the main ingredient it needs to buy, and Starbucks stopped using high fructose corn syrup to make food a few years back.
Starbucks' shares have also sold off recently, so even though both Monster and Starbucks still sell for big premiums, neither company looks as expensive as it was a month ago. Coca-Cola has remained relatively steady during the last month, although the stock split has cut the price of an individual share in half, and Pepsi's shares have rallied. It seems as if investors don't think Monster's sell-off means anything negative for Coca-Cola and Pepsi at all, although Starbucks and Monster are growth stocks so they're more sensitive to short term fluctuations.
The Monster earnings call mentions some problems with damaged products in Japan, which could have increased Monster's manufacturing costs for the quarter. It seems like Monster can improve its distribution processes and fix this problem fairly quickly, and this also doesn't seem like a factor that could create a major issue for Monster's competitors. Coca-Cola, Pepsi, and Starbucks have all been selling drinks in Japan and other nations with strict import rules for many years.
Beverage companies can hedge against rising corn costs and currency fluctuations, and Monster might even decide to set up its own hedges later on. The damaged products seem like a one time hit to Monster's earnings that shouldn't be a major issue going forward. Energy drink lawsuits could be a trickier problem, but Four Loko was an alcoholic beverage, and the alcohol made it more dangerous than regular energy drinks. Coca-Cola, Pepsi, and Starbucks seem like they won't see much negative impact from Monster's problems.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, PepsiCo, and Starbucks. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, Starbucks, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.