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Monster Beverage (MNST) Fails to Produce Monster Earnings

By: , dated August 10th, 2012

Shares of Monster Beverage (MNST: Charts, News) tumbled this week after the company reported third quarter earnings and revenue that missed forecasts. Monster Beverage was formerly known as Hansen Natural, but was renamed in January as part of its expansion efforts abroad. Since the beginning of the year, the company has pushed its energy drinks into new markets, including Hong Kong, Macau, Japan, South Korea and Ecuador.

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The Corona, California-based company earned 59 cents per share, a 31% rise from the previous year, which still missed the average analyst consensus of 61 cents per share. The company generated revenue of $592.6 million, which was 28% higher than the prior year quarter, but also missed analysts’ expectations of $596.1 million. Gross margins dropped 100 basis points to 51.8%, but operating margin grew 50 basis points to 28.6%, while net margin inched up 30 basis points to 18.5%. Sales volume rose 30%.

Monster attributed its weaker earnings to the rising costs of materials, such as sweetener and plastic. Costs increased 31% to $285.6 million. Monster Beverage has been in the spotlight due to its strong line of energy drinks, which also make it a likely acquisition target for any of the larger beverage conglomerates. Coca-Cola (KO: Charts, News) was reportedly in talks to acquire Monster earlier this year, which sent shares up more than 10% before the deal fell through.

The stock’s high trailing multiple of 35 also contributed to its steep 7% slide on Thursday. In comparison, Coca-Cola and Pepsico (PEP: Charts, News) trade at 21 and 19 times trailing earnings, respectively. Despite recent weakness, Monster shares are still up 47% since the beginning of the year. Monster Beverage was also added to the S&P 500 index in June, replacing Sara Lee Corp.

Looking forward, some analysts believe that Monster Beverage could offer a stock buyback program to appease jittery investors. The company is currently sitting on an untapped $250 million share buyback program, and has not bought back any stock since last October. In 2011, Monster bought back 5 million shares worth approximately $176 million. Meanwhile, the company’s cash has grown 17% to $419 million. Its free cash flow rose 42% in 2011 over the previous year. “We still expect Monster to announce a large-size buyback program,” commented Goldman Sachs analyst Judy Hong. Hong believes that shares of Monster could rally an “additional $10″ if the company initiates a new $800 million buyback plan. Hong also believes rising institutional ownership will force Monster to buy back shares to stabilize shares. Monster Beverage CEO Rodney Sacks declined to make any promises, stating that the company routinely evaluates the “merits of a buyback.”

Looking forward, analysts still expect the company to maintain its fast growth throughout the next two years. Analysts believe that earnings will rise 31% to $2.03 in 2012 and climb an additional 21% to $2.50 per share in 2013. Sales are estimated to grow by 25% to $2.1 billion in 2012 and 16% more to $2.5 billion in 2013. While that growth trajectory looks strong compared to other companies, the returns are clearly diminishing. In 2011, the company posted 34% growth. Investors are fearful that Monster Beverage’s strong returns will fade and the stock will no longer be able to keep up with its high multiple. Some analysts believe that the stock could stumble to $40 – a 35% plunge from current prices.

To maintain its growth, Monster is expanding internationally. However, the company has run into contract disputes with distributors in Australia and Central and Eastern Europe. Meanwhile, its Brazilian distributor is facing supply issues. Economic turmoil in Europe and a slowdown in Asian markets could exacerbate the company’s problems in the coming year.

Other News About MNST
Monster Beverage Profit Up 30% But Short of Target
Monster Misses on Top and Bottom Lines.
Monster Beverage Shares Fall After Profit Trails Estimates
The energy drink maker’s shares slid after a profit shortfall.

Other Stocks in the News
Tim Hortons’ Canadian Traffic Ebbs, Shares Slide
More bad news from the restaurant industry.
Jack in the Box Earnings Decline in 3Q
Jack in the Box unsurprisingly posts declines in the third quarter.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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