The 'Retire Young' Portfolio: Monster Takes A Hit

| About: Monster Beverage (MNST)

So far, the worst performing stock of the 'Retire Young' portfolio is Monster Beverages (NASDAQ:MNST). Until recently, the stock's performance wasn't bad; however, the latest earnings report got many investors worried. Right before the company announced its quarterly earnings, the stock's price was $57 per share, and it fell to as low as $46 while the conference call was still going on. The next day, the stock price recovered back to $52 and now it trades for $54 which is still below where it was prior to the earnings report. What do we do with Monster Beverages? Should we keep it in our portfolio or dump it?

We added 200 shares of Monster Beverages to our portfolio on April 18th for $56.49 per share. Immediately after buying the stock, we sold covered calls at a strike price of $57.50 which expires in May 18th. The premium we received from this trade was $2.30 per share. Because of the covered call, our breakeven price fell down to $54.19. At the current price, it looks like the call options we sold will expire worthless, which means we can write more options, sell the stock or keep the stock without writing any options. First, let's determine if we should continue to keep Monster in our portfolio.

In the last quarter, Monster Beverages earned $0.37 per share whereas the analysts were expecting it to earn $0.38 per share. During the conference call, the company's CEO Rodney Sacks said that the sales growth showed some slowing in April, which triggered a panic selling. This led some analysts to revise down their expectations from the company in the near future. For example, the analysts are expecting Monster to earn 64 cents per share in the next quarter and $2.15 per share for the full year. Prior to the earnings report, analysts were expecting Monster to earn $2.26 per share for the full year.

Compared to the same quarter a year ago, the company posted revenue growth of 7% as its quarterly revenue rose from $517 million to $555 million. Monster's gross margin fell from 53.1% to 52.1%. While this is not a big fall and the company still enjoys strong margins, if this downward trend continues, it may worry some investors. The company's operating margin fell sharper, from 27.8% to 22.2%. Apparently, the company spent $8.3 million for distributor terminations and $3.0 million for legal costs in order to deal with some of the recent attacks it received regarding safety of its products. Furthermore, it lost another $4.7 million due to currency transactions. Monster was able to increase its cash holdings to $242 million from $222 million while continuing to be debt-free.

During the earnings call, the company continued to defend the safety of its products. It is said that FDA continues to believe that there isn't sufficient research to show that caffeinated drinks are bad for health. Once again, the company announced that its regular energy drink cans contain half the caffeine that regular Starbucks (NASDAQ:SBUX) coffees contain. Rodney Sacks also mentioned the city attorney of San Francisco, Dennis Herrera because he is attempting to take legal action against Monster regarding the company's advertisement practices. During the conference call, Monster Beverages claimed that it provided Mr. Herrera with many answers and tried to deal with his demands with best intentions; however, Mr. Herrera asked for things the company wouldn't accept, such as changing formulation of its drinks to reduce the amount of caffeine in them. Now it seems like both sides are taking legal action against each other. I really don't think anything will come out of all these legal battles. There are many products that are bad for health in the market and we don't see any of them getting banned. In fact, one could walk into a local grocery store and see hundreds of products that are bad for health (including but not limited to sugary products, fatty products, processed foods, canned foods, sodas, cigarettes, alcohol) but we don't see any of these products getting banned.

I like the fact that Monster Beverages continues to be committed to returning value to shareholders. In the last 2 years, the number of outstanding shares fell from 178 million to 166 million. Furthermore, the company approved another $200 million for more buybacks which can reduce the number of outstanding shares by another 3.7 million at the current price. The company doesn't have dividends at the moment but I can see dividends coming in a few years when the company's growth slows down significantly. For the time being, the focus is on increasing EPS by increasing true earnings and decreasing the amount of outstanding shares at the same time.

Currently there is a lot of negative publicity regarding Monster and safety of its products. Once the negative publicity wears off and people start realizing that these products are not as bad as feared, the double-digit growth rate should return. Both in the US and outside of the country, there are many opportunities for the company to grow as it continues to gain exposure to new markets, new stores and introduces new products in the market. Monster's biggest strength compared to the competition is that it has more than 30 different flavors whereas companies like Red Bull only have a few flavors.

I believe that Monster is still a good investment and I will continue to keep my shares. If and when the call options expire worthless on the 18th, I plan on selling more covered calls in order to bring the breakeven price further down. In conclusion, Monster Beverages will continue to play an important role in our 'Retire Young' portfolio. I agree with the analysts that say that the company is worth at least $60 per share.

Disclosure: I am long MNST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.