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Monster Beverage (MNST) Rises 30% in a Year: More Upside Left?

Monster Beverage Corporation MNST has been gaining from the continued momentum in its energy drinks category, along with a steady line-up of product launches. Also, gains from pricing efforts bode well.

This led to the robust sales performance in fourth-quarter 2022. Net sales of $1,513 million improved 6.2% year over year, while the metric rose 11.9% on a currency-adjusted basis. Net sales to customers outside the United States rose 6.8% to $542.5 million, representing about 36% of the total net sales.

Consequently, shares of this Zacks Rank #3 (Hold) company have rallied 30.1% in a year, outpacing the industry’s growth of 7.3%.

 

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That said, let’s delve deeper into the factors aiding MNST.

Growth Drivers

Monster Beverage is committed to product launches and innovation to boost growth. In fourth-quarter 2022, the company launched several products and expanded distribution in the international markets. In the United States, MNST launched Monster Energy Zero Sugar at retail in January 2023, along with the introduction of Monster Energy Ultra Strawberry Dreams, Monster (stylized) Reserve Kiwi Strawberry, Monster Energy Nitro Cosmic Peach and Java Monster Caffe Latte in early February.

In the fourth quarter, the company launched Monster Rehab Lemon tea in Japan, Monster Ultra Watermelon in Turkey, Monster Ultra Paradise in Vietnam, Predator in Malaysia, and continued the national rollout of Predator India. It intends to introduce the Predator brand in additional countries in the APAC in 2023.

Recently, the company launched its first flavored malt beverage alcohol product, The Beast Unleashed, in six states, available in four flavors. This product is likely to expand into additional markets in the second quarter, with the goal of a nationwide launch by the end of 2023. It is also on track with the launch of Monster Tour Water, a pure unflavored water line, in still and sparkling variants.

MNST revealed its intention to launch a total wellness energy drink, Reign Storm, in March 2023, in four flavors. As part of an ongoing pan-EMEA launch in the first quarter of 2023, the company launched the distribution of Monster Energy Lewis Hamilton 44 Zero Sugar and an affordable energy brand, Fury, in Egypt. Also, Monster Beverage is focused on transitioning to the Coca-Cola distribution system in the Philippines in the second quarter of 2023.

Strength in its energy drinks category has been long serving as a catalyst. In fourth-quarter 2022, the Monster Energy Drinks segment's net sales increased 2.6% year over year to $1.4 billion. The segment’s sales included a negative impact of $76.9 million from adverse currency rates. On a currency-adjusted basis, net sales for the segment rose 8.3%.

According to Nielsen, sales for the energy drinks category, including energy shots, increased 15.1% year over year for the 13 weeks ended Feb 11, 2023. Sales for the company's energy brands, including Reign, rose 14.8% in the 13-week period ended Feb 11, 2023. Sales for the Monster brand improved 13% year over year in the quarter.

Also, sales for the Strategic Brands segment, which include affordable energy drink brands and a range of energy drink brands acquired from Coca-Cola, rose 41.8% to $65.6 million in the fourth quarter. On a currency-adjusted basis, net sales for the Strategic Brands segment increased 49.4%. Management is optimistic about strength in the global energy drinks category and remains poised to gain from growth in the Monster Energy family of brands and strength in strategic and affordable energy brands.

It is on track with price increases to wean the ongoing cost pressures. MNST has been implementing price hikes since the first half of 2022. Notably, the company implemented a price increase of 6% market-wide in the United States, effective Sep 1, 2022, and will implement a price increase on its 24-ounce line, effective Apr 1, 2023. It also implemented price increases in the second half of 2022 in certain international markets and will implement additional price increases on a phased approach in the first half of 2023 in a number of international markets.

Cost Headwinds

Monster Beverage has been reeling under the strong US dollar, as well as cost inflation related to increased energy costs, particularly in EMEA, ingredient and other input costs, and co-packing fees. This led to a weak bottom line in fourth-quarter 2022, wherein earnings declined 4.9% year over year.

The company witnessed a significant increase in the cost of sales, which caused a decline in the gross profit and the gross margin rate. The cost of sales of $728.6 million was up 11% year over year due to the higher logistics costs, and unfavorable geographical and product sales. Elevated ingredients and other input costs, comprising secondary packaging materials and increased co-packing fees, also hurt the cost of sales.

The gross margin contracted 210 basis points (bps) to 51.8%, driven by higher ingredient and other input costs, geographical and product sales mix, and elevated logistical costs, offset partly by pricing actions. The metric increased on a sequential basis, driven by pricing actions, as well as recovery in the supply chain.

Also, a significant rise in distribution expenses, including increased fuel, freight and warehousing costs, remains concerning. As a result, operating expenses grew 10% year over year to $390 million in fourth-quarter fiscal 2022. The increase can be attributed to higher warehousing and other logistical expenses, elevated payroll expenses, and increased general and administrative expenses. As a percentage of sales, operating expenses rose 90 bps to 25.8%, while the metric contracted 310 bps on a three-year basis.

Higher operating expense rates mainly resulted from increased distribution costs, stemming from higher warehousing expenses and other logistical expenses. Distribution costs, as a percentage of net sales, increased 10 bps to 5% and 150 bps on a three-year basis. General and administrative expenses, as a percentage of net sales, rose 100 bps year over year, while the metric contracted 200 bps on a three-year basis to 11.1%.

Consequently, operating income of $394.4 million declined 4.5% year over year, driven by a decrease in the gross margin, as well as higher operating expenses. The operating margin contracted 290 bps to 26.1% in the reported quarter.

Bottom Line

Monster Beverages appears well-placed for further growth despite rising costs, driven by the introduction of innovative products across the Monster family to suit consumers’ needs, as well as strength in its energy drinks category. A long-term earnings growth rate of 22.5% raises optimism on the stock. Also, a Momentum Score of B bodes well.

Stocks Worth a Look

Some better-ranked food stocks are Post Holdings POST, General Mills GIS and Vital Farms VITL.

Post Holdings, which operates as a consumer-packaged goods company, currently sports a Zacks Rank #1 (Strong Buy). POST has a trailing four-quarter earnings surprise of 34.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Post Holdings’ current-fiscal-year EPS suggests an increase of 111.3% from the year-ago reported number.

General Mills, a branded consumer foods company, currently carries a Zacks Rank #2 (Buy). GIS has a trailing four-quarter earnings surprise of 8.7%, on average.

The Zacks Consensus Estimate for General Mills’ current-fiscal-year sales and earnings suggests growth of 5% and 6.1%, respectively, from the year-ago reported figures.

Vital Farms, which provides pasture-raised products, currently carries a Zacks Rank #2. VITL has a trailing four-quarter earnings surprise of 53.3%, on average.

The Zacks Consensus Estimate for Vital Farms’ current-fiscal-year sales suggests an increase of 25.4% from the year-ago reported number.

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Vital Farms, Inc. (VITL) : Free Stock Analysis Report

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