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Q4 2012 proved to be another headline and news-filled quarter for Monster Beverage Corporation (NASDAQ:MNST). After missing analysts' expectations in Q3 of 2012 yet still showing YOY growth, shares of MNST continue to see strong selling and short speculation pressures. As the share price more than doubled this year, investors are now wondering and contemplating whether or not MNST has seen its best days or whether its worst days are now in the rear view mirror.

Upon the company's Q3 2012 release, shares of MNST plunged below $40 a share in the after hours trading session only to rebound shortly thereafter. On November 13, 2012, Monster's Board approved a new $250 million share repurchase program after the old share repurchase program had completed.

Let's first start with Q4 2011 results and move on to Q4 2012 analysts' expectations:

  • Net sales of $410 million
  • Diluted earnings per share of $0.35 a share
  • Net sales in Europe grew 46.1%
  • Gross sales in October 2011 grew 31.1% YOY
  • Gross sales outside of the US 88.9
  • Gross profit margin was 52.3% in the quarter
  • Effective tax rate was 38.3% in the quarter
  • Inventories were $155.6 million in the quarter

Q4 2012 analysts' expectations:

  • Net sales of $485.86 million
  • EPS of $.42 a share
  • Sales growth of roughly 18.5%
  • Gross margins of 53.1%
  • Effective tax rate of 38.7%

Now that we have an understanding of what MNST is up against in the current quarter, let's analyze more closely how the company has performed recently and the ongoing state of operations and the overall industry which Monster Beverage presides. First, we know and understand that this is a highly competitive industry which is led by Red Bull in dollars, but Monster beverage in volume.

According to the Nielsen reports and for the 13 weeks through October 20, 2012, on the previously reported basis for all outlets combined, namely convenience, grocery, drug and mass merchandisers, excluding Wal-Mart, sales in dollars in the energy drink category including shots increased 13% versus the same period a year ago. Sales of Monster grew 18.7% in the 13-week period, while sales of Red Bull increased by 16.9%. Sales of Rockstar increased by 11.4% and sales of 5-Hour decreased by 1.8%. Sales of Amp were down 10.4%. NOS increased 11.1% off a low base, and sales of Full Throttle increased 6.9%. Additionally, Nielsen reports that for the four weeks ended October 20, 2012, sales of energy drinks in the convenience and gas channel in dollars, increased by 10% over the comparable four week period in 2011. Sales of Monster increased by 19% over the comparable period last year, almost twice the growth of the energy drink category in convenience and gas, while sales of Red Bull increased by 12.6% over the same period. Rockstar was up 6.2% while 5-Hour was down 8.4%. And now we know why 5-Hour Energy has increased their commercial advertising campaign drastically since the beginning of October. Lastly, according to Nielsen, Monster is now leading the energy drink category in market share in the convenience and gas channel in the U.S. by .5% over Red Bull. Red Bull is still the leading energy drink producer in Canada's convenience and gas channel by a wide margin.

Competition:

The competitive landscape for the energy drink industry continues to evolve as more and more competitors come into the market space. Coca-Cola (NYSE:KO) continues to drive towards greater market share with their brand of energy drinks in Europe named Relentless. During the summer, Coca-Cola launched a commercial ad campaign in the UK with local rapper Professor Green. The company's newer energy drink brand, Burn, is gaining popularity in Europe as well and Coca-Cola has recently signed a marketing partnership with Lotus FI to spearhead this campaign. PepsiCo (NYSE:PEP) is adding to its Amp line of energy brand drinks with a new energy juice drink called Kickstart. Kickstart is a fruit-flavored Mountain Dew beverage. The serving size of this new competitor will be delivered to the marketplace in 16oz cans just like the leading energy drink provider beverages. Kickstart has far less caffeine than energy drinks, with roughly 92 milligrams for a 16-ounce can. A comparable amount of regular Mountain Dew would have 72 milligrams of caffeine, while a can of PepsiCo's Amp energy drink has 142 milligrams, according to the Center for Science in the Public Interest. Pepsi will launch Kickstart in the U.S. near the end of February 2013.

Another relatively new competitor to the energy and vitamin enhanced beverage market includes the micro-cap company Pulse Beverage Corporation (OTCQB:PLSB). If you haven't heard of this tiny company before, the company is introducing its Pulse® brand of functional water-based beverages in three separate categories through a nationwide sales network. Pulse's line of functional beverages address key nutritional needs of people of all ages, but specifically for people 30+ who want to feel 30+ for the rest of their lives. Pulse® beverages contain functional ingredients, including certain vitamins and anti-oxidants such as Vitamins C, D, E, B6, and B12, Folic Acid, Calcium, Magnesium, lycopene, selenium, soluble fiber, green tea catechins and soy isoflavones. It is accepted in the health industry that these vitamins are nutritional and aid in promoting health. The Pulse® brands are presently formulated as three nutritional beverages in a variety of flavors and 5 low calorie Lemonade flavors aimed at providing healthy and nutritious beverages to consumers. Pulse's products differ from the competitors in that they are the direct result of a multi-year research program undertaken by one of the nation's leading professional healthcare companies, the Baxter Healthcare Corporation. The company's current distribution reach aims at achieving 15,000 retail outlets in the United States alone by FY14.

The competition keeps increasing as another new entrant comes to market which is also manufactured in the United States, Champion Energy. CHAMPION ENERGY is a powerful energy shot, available in 2 flavors and bottled in a convenient and easy-to-carry, 2 fl. oz. (59ml) container. CHAMPION ENERGY contains a unique combination of energy-producing nutrients, is packed with B-Vitamins and Amino Acids, provides support for neural processes and is ideal for sustained mental energy, clarity and concentration.

I could go on and on with even more competitors entering the functional and energy drink category, but we would literally be here all day. I guess investors will simply have to consider competition and its threat moreso than in the past as it pertains to their investment in MNST or any beverage producer for that matter.

Moreover, beverage producers like Monster and Red Bull are not just competing within the niche product category of energy drinks, but with the consumer's fickle nature which seems to be moving toward coffee and coffee flavored drinks. MNST understood this shift in consumer demand and entered the market with its own line of energy coffee-flavored drink called Java Monster. The Java product line, according to Nielsen, in the 13 weeks ended October 20, 2012, for all outlets combined, sales of energy plus coffee drinks, in dollars, increased 19% over the same period last year. Java Monster was 23.3% higher than in the comparable period last year and Starbucks Double Shot energy was up 18%. Monster has planned a launch for a Cappuccino flavored beverage in the first half of 2013 alongside Ultra Pink which is part of Monster's zero-calorie line.

Recent studies from the National Coffee Association and NPD show an alarming number of teenagers and young adults are becoming coffee consumers. "According to the American Dietetic Association, when it comes to teenagers drinking caffeinated beverages, the number has tripled since the 1970's. It also reports that teens purchasing coffee in cafes or restaurants jumped by 12% last year. And, when you consider that Americans are currently consuming around 350 million cups of coffee every day and a growing percentage of that number is being consumed by teens, the numbers are a bit staggering. According to a study done in 2011 by the firm NPD, 10% of all visits to gourmet coffee shops were by consumers under 18 years of age. Last year, that number was 13%. And, not only are more teens starting to drink coffee, research is showing that they're also likely to be life-long coffee drinkers. In 2002, 24% of 18-24 year olds drank coffee. By 2010, that number was at 37%".

Monster markets its beverages to young adults and some would argue that the company markets to teenagers as well. While this remains open to debate, there is no debate that both age groups are drinking Monster Beverage products in droves. Monster has done a fine job extending its product line to include energy drinks + coffee, but what the company can't do presently is replicate the coffeehouse experience that seems to be proliferating among teens and young adults. It remains to be seen how and if the company addresses this growing trend. Maybe we will see Monster launch an extension of the Java Monster product line or partner with a major coffee drinks producer going forward. One such partner for this particular line of energy + coffee drinks could be Green Mountain Coffee Roasters (NASDAQ:GMCR). Due to the fact that the Java Monster products are non-carbonated beverages, the Keurig system might prove to be a beneficial revenue arm for Monster Beverage in the direct to consumer market through licensed k-cups. Additionally, this speculative partnership could help Monster to drive consumption of Monster products with a whole new consumer demographic. Dr. Pepper Snapple Group (NYSE:DPS) has signed an agreement with GMCR to manufacture and distribute Snapple-flavored tea K-cups suitable for single serve Keurig machines. Could Monster Beverage take this partnership into consideration as well?

Monster Expansion:

In spite of recent expansion efforts which have proven to be more difficult than Monster originally planned for, the company continues to expand the reach of its global business. In Q3 2012 the company completed its expansion into the Philippines and Turkey. Additionally, and in conjunction with a new distributor, the company also participated in an expanded launch in the Ukraine.

Monster also outlined its intentions to enter Chile, Peru and Singapore in the near term with expected additional launches of Monster Energy in Argentina and Taiwan this year as well. After much hardship with getting product and label approval in Korea, MNST now believes that they have overcome product approval and label issues in Korea and anticipates commencing sales there within a few months. The company reiterated this belief with respect to selling goods in Korea on its December 11, 2012 Investor Meeting/Business Update. Additional markets of interest for the company in 2013 and beyond include India, Nigeria, Albania, Croatia, Macedonia, Romania, Kuwait and Georgia to name a few.

South America remains wide-open for Monster Beverage to explore further market penetration, but recent setbacks in Brazil have proven to be a headwind for the company to overcome. Troubles persisted with its Brazilian distribution partner over the prior 6 months, forcing the company to formulate a new distribution partnership with AmBev. AmBev commenced distribution of Monster products in Brazil during January 2013. Commenting most recently on the deal between AmBev and Monster Beverage Corp. was Mark Astrachan of Stifel Nicolaus:. "Overall we view the announcement favorably given AmBev's distribution is superior to current distribution in many LatAm markets, including Brazil, where the company has 69% beer market share and 20% CSD market share. We anticipate new distribution will expand the company's current distribution footprint in Brazil into new channels, such as small stores, and smaller cities, with the greatest upside coming from growing the energy category." Stifel Nicolaus maintained its Buy rating for the group's stock.

Operations and Margins:

Gross margins have come under pressure recently and saw a steep YOY decline in Q3 2012 as margins fell sharply to 50.5% from 52.7% in the same period a year ago. Monster noted that higher effective tax rates, lower sales in the U.S., lower sales to Coca Cola refreshments Canada Ltd., lower sales in its warehouse segment, lower sales for Worx and changes in foreign currency exchange rates had an unfavorable impact on net sales during Q3 2012. Additionally, while the company achieved profitability in South Africa, Central and Eastern Europe are still incurring operational losses. Monster is continuing to sell in market Worx Energy shots, although there has been a substantial drop-off in sales.

The company stated that the decrease in gross profit as a percentage of net sales during Q3 2012 was largely attributable to geographic mix, production variances and product damages primarily in Europe and Asia (Japan), including production cost increases forced onto the company by partners in the United Kingdom, an increased promotional and other allowances as a percentage of net sales.

As I have outlined before, many European nations are increasing the regulations surrounding energy drink products as well as other sugar-sweetened, carbonated beverages. This increase in regulatory changes usually means higher related costs to the producer of such products. We would expect to hear more or see more related to this topic going forward as the company struggles to achieve and/or maintain profitability in Europe.

With regards to Asia and Japan specifically, the company recently discussed a search for a regional producer and we expect this search to continue. Operational losses in Japan due to higher than expected shipping damages and quality control measures will likely have continued to pressure profitability in the region during Q4 2012.

Recent Headlines:

  • On February 13, 2013, Monster Beverage announced its labels on cans will list "nutrition facts" instead of "supplement facts," qualifying the beverages as food items under U.S. Food and Drug Administration policies.
  • On February 15, 2013, rumors circulated shares of MNST citing the company as a takeover target once again.
  • On October 22, 2012, Monster was cited in energy drink related deaths.
  • On November 27, 2012, the FDA says they are planning no immediate action against Monster or other energy drink producers.

When parsing out the Monster Beverage business we can't deny that the company is continuing to expand and grow its sales. However, we have to understand the rate of growth, how it compares to past quarters, and what analysts are projecting for 2012 and 2013 on average:

  • Profit is seen rising 31% to $2.03 a share in 2012.
  • Sales are predicted to climb 25% to $2.1 billion in 2012
  • Profit is seen rising 21% to $2.50 a share in 2013.
  • Sales are predicted to climb 15% to $2.4 billion in 2013.
  • Earnings are expected to grow by 15% in to $2.32 in 2013.

When considering an investment in MNST, investors should weigh the pros and the cons. We currently see an equal mixture in the two based on the market data at hand. Capital Ladder Advisory Group recognizes the pros for the recently ended quarter and fiscal year as follows: growing demand, continued expansion, new distribution deals will enhance market share in S. America and the Caribbean, maturing Asian market will turn profitable near to mid-term, YOY Euro/USD is more favorable, company remains innovative with product roll-outs, switch to food labeling instead of supplement labeling, litigation should subside although still impacts firm currently, marketplace will consolidate around 5 key players over time, growing market share in new and existing regions, strong free cash flow annually and new share repurchase program. We recognize the cons in the near to mid-term as follows: current headline risks way on sales of Monster Beverage products, Asian markets continue to develop unprofitably near term, growing taxation and regulatory environment around energy drink and sugar sweetened CSDs in Europe continues, ongoing litigation may increase negative sentiment toward stock, consumer demand shift continues, apple concentrate costs rise and further distribution headwinds beset the company. Overall, Capital Ladder Advisory Group believes the company may turn a corner in the near term as the headwinds from 2012 play out in the early parts of 2013. According to Capital Ladder's research, channel checks for Monster Energy drinks continue to show signs of moderating growth while the average cost per 16 oz. can has declined by $.06 YOY across mass market channels (excluding grocery).

Source: Monster Beverage Q4 2012 Preview