It's Time to Go Easy on This Energy Drink Maker

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The recent performance of Monster Beverage (NASDAQ: MNST) is a signal that things are slowing down for this energy drinks maker. It is not that the company has fared very poorly, but its revenue and earnings misses in the second quarter indicated that its momentum has eased, which triggered a sell-off. 

Investors have always loved this stock as it provides rare exposure to the growing energy drinks sector (Red Bull is privately owned), and Monster has not disappointed. Over the past two years, the stock has gained around 57%. But, now with Monster’s sales growth down to single digits, it is better to adopt a cautious stance and stall decision making until we get more clarity regarding which way the trends will move.

The revenue and earnings misses

Monster’s profits were down 2.7% from $109.8 million a year ago to $106.9 million in the second quarter. Earnings per share came in at $0.62; this was higher than last year’s $0.59 per share on account of fewer shares outstanding. Net sales increased 6.5% to $630.9 million. Analysts had expected earnings of $0.64 per share on net sales of $646 million.

Sales trends

Monster’s sales have been affected by the ongoing negative publicity against the energy drinks sector on account of the high caffeine content in these beverages. According to Euromonitor, the US energy drinks sector had a compound annual growth rate, or CAGR, of 28.8% between 2001 and 2011. But current data by another researcher, TechNavio, suggests that their expectation from this sector is a CAGR of 12.9% between 2012 and 2016.

A reflection of these trends can be found in Monster’s sales growth rates. The company grew its net sales by 30.6% in 2011 over 2010, and by 21.0% in 2012 over 2011. But, in 2013, net sales have grown by just 7% in the first six months from $1.05 billion to $1.12 billion. For the full year, analysts expect no more than 8.9% growth.

On a positive note, the company has been outpacing the overall industry growth. Monster has cited that, according to Nielsen data for the 13 weeks through July 27, the dollar sales of energy drinks in all outlets sampled by the latter grew 2.7%, while Monster drinks grew by 10.1%. The channels included were convenience, grocery, drug, and mass merchandisers. On the same basis, Red Bull grew by 6.7%.

Legal costs have become a steady feature

Legal costs are mounting up against Monster as it remains involved in several litigations and keeps defending the safety of its drinks. In the first quarter, the company paid $3 million in legal expenses and $4.2 million more in the second quarter.

Although the company’s profitability was also dented by the foreign currency losses of $3.6 million and a charge of $2 million arising out of distributor transitions, it is the legal costs that have attracted the most attention. In addition to wiping out profits, these costs also have a negative impact on the company’s image.

Beverage makers have been under pressure

The second quarter has been challenging not just for Monster but for the soda kings as well. Both Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) reported a drop in their beverage volumes in North America. The former reported a 4% decline in soda volumes, while the latter witnessed a 5% dip.

As far as their energy drinks are concerned, according to the aforementioned Nielsen survey, sales of Amp, owned by PepsiCo, were down by 15.4% during the 13 weeks through July 27. Coca-Cola saw mixed results; its NOS increased sales by 16.5% while Full Throttle was down 2.9%.

With soda volumes declining in the US, it is important for the soda makers to develop alternate business lines. PepsiCo enjoys a buffer on account of its snacks business, but for Coca-Cola, which is a pure beverage play, it is more of a challenge. However, the company has done well to grow its still beverage business, which grew an impressive 5% in North America during the second quarter. Meanwhile, PepsiCo witnessed 6% organic revenue growth in its Americas Foods division on the back of sales volume in North America and better pricing in Latin America.

Investors can continue to expect good returns from these stocks.

Last word

After the meteoric rise of energy drinks over the last decade, the market may take some time to adjust to the current slowdown. But the good thing is that the industry is still poised to grow at double-digit rates and Monster has a track record of outperforming the industry. So, if it can improve its sales to meet or exceed analysts’ expectations the stock can start to climb again. Investors might be better off if they wait to see which way the sales trends move before taking a final call on Monster.

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Eshna De has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage and PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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