Company Overview: Monster Beverage Corporation develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle. The Company has three segments: Monster Energy Drinks segment, which consists of its Monster Energy drinks, as well as Mutant Super Soda drinks; Strategic Brands segment, which includes various energy drink brands owned through The Coca-Cola Company (TCCC), and Other segment (Other), which includes the American Fruits & Flavors (AFF) third-party products. The Strategic Brands segment sells concentrates and/or beverage bases to authorized bottling and canning operations.
 

MNST Details

Innovative Product Offerings to Lead to Higher Market Share: Monster Beverage Corporation (NASDAQ: MNST) is engaged in developing, marketing, sale and distribution of energy drink beverages and concentrates for energy drink beverages. The key brands include, Monster Energy®, Monster Energy Ultra®, Monster Rehab®, Monster MAXX®, Java Monster®, Muscle Monster®, Espresso Monster®, Relentless®, BPM®, BU®, Gladiator®, Samurai®, Mutant®, etc. The company derives its revenue by selling ready-to-drink packaged energy drinks primarily to bottlers and beverage distributors. In some cases, the company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers, and the military. The Coca-Cola Company holds the highest stake in the company with ownership of 18.74% as on 16 March 2019. Monster Energy® drinks are sold across 142 countries and territories globally. Strategic Brands, comprised of various energy drink brands that the company acquired from The Coca-Cola Company in 2015, are being sold in approximately 96 countries and territories globally. One or more of MNST’s beverages are available at approximately 155 countries and territories worldwide.

During FY18, MNST delivered 13% y-o-y topline growth at $3,807 million while the company’s bottom-line grew by 21% y-o-y at $993 million during the period. Operating income during FY18 stood at $1,283.6 million as compared to $1,198.7 million in FY17. Looking at the past financial performance, top-line of the company grew at a CAGR of ~11.5% over the period of FY14-FY18 whereas net income posted a CAGR growth of 19.7% over the same period.

The company has continued to expand its operations internationally into a variety of new markets, including launches in China and various African and Middle Eastern countries. MNST will continue its focus on cost management by reducing input procurement and production costs along with marketing expenses. The company will also maintain an efficient capital structure to optimize working capital in order to finance expansion, both domestically and internationally. Going forward, considering the opportunities such as growth potential for company’s products, both domestically and internationally, new product and product line introductions for higher profitability, effective strategic positioning to capitalize on industry growth, expansion of distribution channels, etc., we expect the company to continue to sustain its market share in the beverage industry.
 

Financial Performance over FY14-FY18 (Source: Company Reports)

Q2FY19 Operating Performance:Monster Beverage Corporation came up with second quarter FY19 results, wherein it posted net sales at $1.10 billion, up 8.7% on pcp and net income at $292.47 million from $270.1 million in Q2FY18. Operating income during the second quarter increased by 5.28% y-o-y at $379 million. Gross profit, as a percentage of net sales, for the second quarter of FY19 came in at 59.9%, compared to 61.1% in Q2FY18. The decline in gross profit as a percentage of net sales was largely on the back of geographical and product sales-mix, followed by a rise in certain other input costs. Operating expenses during the quarter stood at $282.3 million as compared with $262.6 million in the previous corresponding period. Operating expenses included, $0.3 million as distributor termination expenses compared with $5.5 million in the second quarter of FY18. Distribution costs stood at 3.4% as a percentage of net sales in Q2FY19, improved from 3.7% in Q2FY18. Selling expenses as a percentage of net sales during the second quarter came in at 11.2%, marginally improved from 11.4% during the second quarter of FY18.

The company launched Monster Energy® brand energy drinks at Middle East, Latin America, and the Caribbean. MNST is planning to introduce new Monster Energy® brand energy drinks in the United States and in various international markets. During the second quarter, the company also launched Predator®, an affordable energy drink in several international markets and plans for further launches of Predator® during the second half of FY19.


Q2FY19 Financial Highlights (Source: Company Reports)

Six-months Performance: MNST posted net sales for the six-months ended June 30, 2019 at $2.05 billion, higher by 9.8% in the comparable period last year. Gross sales during the period grew 8.9% on pcp to $2.38 billion. The business was affected by unfavorable foreign currency exchange rates by $47.9 million and $56.6 million, in net and gross sales, respectively for the six-months ended June 30, 2019. Gross profit, as a percentage of net sales, stood at 60.2%, compared to 60.8% in the corresponding period of last year. The company reported operating expenses for the six-months of FY19 at $544.4 million as compared with $498.0 million in the previous period of last year. MNST reported operating income at $690.5 million in H1FY19 from $637.5 million in H1FY18.


Six Months Performance (Source: Company Reports)

Segment-Wise Performance: The Company basically has three operating segments- (a) Monster Energy® Drinks segment, primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (b) Strategic Brands segment, comprised primarily of the various energy drink brands acquired from The Coca-Cola Company in 2015, as well as the Company’s affordable energy brands, and (c) Other segment, comprised of certain products sold by American Fruits and Flavors LLC, a wholly-owned subsidiary of the Company, to independent third-party customers (the “AFF Third-Party Products”). Monster Energy® Drinks segment represented 91.7%, 90.1% and 90.1% of net sales for FY18, FY17 and FY16, respectively.

During the second quarter of FY19, Monster Energy® Drinks reported total sales of $1.02 billion, grew 9.65% on pcp, representing 92.31% of the total revenue. Operating profit from the segment stood at $410 million, up 10.1% from the corresponding quarter. The Strategic Brands derived 7.17% of the total revenue and posted a de-growth of 0.84% on pcp basis at $79.14 million. Operating income from the segment stood at $50.075 million, a decline of 1.4% on Q2FY18. Strategic Brands represented only 0.52% of the total revenue.

During the second quarter of FY19, net sales outside the US came in at $343.3 million as compared to $293.8 million for Q2FY18. Revenue outside the US accounted for approximately 31% and 29% of net sales for the three months ended June 30, 2019 and 2018, respectively.

Non-GAAP 2QFY19 Performance: Gross sales during Q2FY19 came in at $1.29 billion, a growth of approximately $95.2 million, or 8.0% higher from the gross sales of Q2FY18 at $1.19 billion. Gross revenue during the quarter was positively impacted by approximately $31.3 million due to a price increase from November 1, 2018 in the United States and effective from February 1, 2019 in Canada, on certain Monster Energy® brand energy drinks. During the quarter, currency exchange rates had an unfavorable impact on gross sales of approximately $30.7 million. Gross revenue from the Monster Energy® Drinks segment stood at $1.19 billion for Q2FY19, witnessed a growth of approximately $97.9 million, or 9 % higher over Q2FY18. Growth across Monster Energy® Drinks was driven by (i) sales of Reign Total Body FuelTM high performance energy drinks, during the first quarter of FY19, and (ii) the price increase as mentioned above.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 55.61% of the total shareholding. Coca-Cola Co and Brandon Limited Partnerships hold the maximum interest in the company at 18.74% and 7.96%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The company posted decent margins in the second quarter of FY2019. Gross margin for Q2FY19 stood at 58.5%, lower over Q1FY19 and Q2FY18, however, remained above the industry median of 52.6%. EBITDA and net margin for 2QFY19 came in at 35.9% and 26.5%, above the industry median of 19.3% and 9%, respectively.


Key Metrics (Source: Thomson Reuters)
 
Industry Overview:
The products of MNST is categorized under the “alternative” beverage category combining non-carbonated, ready-to-drink iced teas, lemonades, juice cocktails, single-serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks and single-serve still waters (flavored, unflavored and enhanced) with “new age” beverages, including sodas that are considered natural, sparkling juices and flavored sparkling beverages.

According to Beverage Marketing Corporation, domestic U.S. wholesale sales in 2018 for the “alternative” beverage category of the market are estimated at approximately $55.5 billion, representing an increase of approximately 6.7% over estimated domestic U.S. wholesale sales in 2017 of approximately $52.0 billion. The beverage industry is highly competitive where the principal areas of competition are pricing, packaging, development of new products, flavors, product positioning as well as promotion and marketing strategies. The company has a wide range of drinks produced by a relatively large number of manufacturers, some of which have substantially greater financial, marketing and distribution resources.


Key Valuation Metrics (Source: Thomson Reuters)

Outlook: The beverage industry depends upon consumer preferences and shifts in consumer preferences may adversely affect the business. Increasing awareness of and concern for the health consequences of obesity may reduce the demand of non-diet beverages. Global uncertainties like foreign currency exchange rates, affects businesses such in several ways, making it difficult to accurately forecast and plan of future business activities. Unfavorable economic conditions and financial uncertainties across major international markets, including uncertainties surrounding the United Kingdom’s may reduce demand for the products.

The company’s sales and marketing team have maintained its focus on developing brand awareness through image-enhancing programs and product sampling. The company uses branded vehicles and other promotional vehicles at events where the company offers samples of products to consumers. The company continues to review the products and packaging on an ongoing basis and endeavor to make them different and unique. Going forward, strong presence in the industry, product innovation, keen watch on cost management, etc., augur well for the company’s growth in the long run.
 

Historical PE Band (Source: Thomson Reuters)

Stock Recommendation: The stock of MNST is trading at $56.87 with a market capitalization of ~$30.98 billion. The 52-week trading range of the company stood at $47.74 to $66.38. During the quarter, the company has delivered a decent operating margin and net margin at 34.3% and 26.5% as compared to the industry median of 14.6% and 9%, respectively. Despite adverse currency fluctuations in the recent past, the company was able to maintain the profitability and margins in the recent quarters. ROE has improved from 7.2% in Q2FY18 to 7.5% in Q2FY19, higher than the industry average of 3.7%.

Considering the above scenario and business prospects over the long-term, we have valued the stock using ten-year average P/E market multiples of ~30x for FY20E with consensus EPS of $2.26 and have arrived at a target price upside of double-digit growth (in percentage terms). At CMP of $56.87, the stock of the company is trading at P/E multiple 25.16x of FY20E EPS. Hence, we recommend a “Buy” rating on the stock at the current market price of $56.87 per share, down 1.54% on September 11, 2019.

 
MNST Daily Price Chart (Source: Thomson Reuters)

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