Monster: Growth Story Is Still Intact

Feb.28.14 | About: Monster Beverage (MNST)

In the after-hours of Thursday, Monster Beverage (NASDAQ:MNST) announced its financial results for the fourth quarter and full-year of 2013. The results showed that the company's growth continues despite the challenging environment in the consumer markets we saw across several industries.

For the fourth quarter, Monster Beverage generated $621.1 million in revenues, up 14.0% from the $545.0 million generated in the same quarter of last year. In the international markets, the company's revenue rose from $115.2 million to $137.9 million, an increase of 19.70%. For the full-year, the company generated $2.6 billion in gross revenues, up 9.0% from last year's $2.4 billion.

During the fourth quarter of last year, Monster's gross margins came down slightly from 51.7% to 51.2%, and this was a result of issues that occurred in the company's inventory management (if we look at North American gross margins alone, they were actually on the increase). During transport, some of the inventory was damaged, making many products not-sellable. On the other hand, Monster's operating margins got better, as the company's distribution costs, selling expenses and general and administrative expenses did not rise as fast as its revenues did. Compared to a revenue increase of 14.0%, the company's operating income rose by 18.3% during the fourth quarter of 2013 compared to the fourth quarter of 2012 (distribution costs made up 4.5% of the company's revenues and selling expenses made up 10.8% of its revenues, down from 4.7% and 12.5% respectively).

During the fourth quarter, Monster's effective tax rate was exceptionally high at 42.2%, eating into much of the company's profits (in comparison, the tax rate in the fourth quarter of 2012 was 39.1%). During this quarter, the company did not get tax benefits for losses in certain local business units and its deferred tax assets in different countries received full valuation allowance. As a result, even though Monster's operating income rose by 18%, the company's net income only rose by 12% (up from $68.0 million to $76.1 million, in other words, up from $0.39 per share to $0.44 per share).

Apart from damaged inventory and high tax rate, Monster's profitability was also influenced by currency exchange rates as the company posted a small loss (i.e., $3.6 million) on foreign currency transactions. Furthermore, Monster had to spend more than usual on litigation costs as it had to hire a number of lawyers for its case with the City Attorney of San Francisco, as well as other matters. For example, Monster had to consult some lawyers for matters related to its advertising, marketing and promotion practices. The legal costs during the quarter totaled $4.7 million, up from $1.4 million in the fourth quarter of 2012.

During the quarter, the company launched new products such as Monster Energy Ultra Red and Muscle Monster. The new products allowed the company to grow its sales faster than the overall energy beverage market, which allowed it to gain market share. Also, Monster is moving to new segments such as protein drink segment with its new products and it can continue to gain market share in these new segments in the long term. In fact, during the conference call, the company claimed a 22.8% market share for its protein drink (i.e., Muscle Monster) in certain channels such as gas stations and convenience stores. In India, the company gained regulatory approval and it was recently launched by the company's local distributor. This is a new market for the company with huge potential.

During the conference call, the company acknowledged that it has sold more than 10 billion cans so far with little to no health effects. As usual, it was mentioned that the company's drinks are safe to consume with no known risk factors. The company is also moving forward with its case against the City Attorney of San Francisco as it filed a motion to strike allegations in the complaint filed by the city attorney. Earlier in the quarter, a case filed by three individuals against Monster Beverage was dismissed by the court and the case is currently in an appeal stage. This case was questioning safety of the company's products as well as its marketing practices.

While the company's growth rate was a little slower than usual, the growth story is still intact and it looks like Monster will continue to see double-digit growth rate for the foreseeable future. During the quarter, Monster repurchased 1 million shares at an average price of $56 and the company will probably accelerate its share buyback program as its growth starts slowing down further in order to make up for the difference. In the last quarter, Monster's average diluted share count was 173.37 million, down from last year's 176.11 million. I like the fact that Monster is buying shares back even though it is still in an aggressive growth mode.

When we look at the company's balance sheet, we see $211.35 million in cash and $402.25 million in short-term investments, totaling $613.6 million in liquid assets. This compares nicely with last year's $222.51 million in cash, $97.04 million in short-term investments, totaling $319.55 million in liquid assets. Monster continues to be debt-free, which increases the likelihood that the company will be returning more of its income to investors once its growth starts slowing down further down the line.

I find it very encouraging that Monster's newly launched products are getting a lot of positive attention from consumers and the fact that whenever the company launches a new product, the newly launched product immediately starts earning market share for the company. This shows the potential for Monster in the long term and this is one of the investments I've been happy with. While soda producers like Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) keep recording lower soda sales each quarter, Monster continues to grow quarter-after-quarter. This is why it surprises me that one of these companies hasn't attempted to buy Monster yet. As Monster's valuation increases nicely, it is becoming less likely that the company will be bought anytime soon; the company is simply getting too big to be bought. Acquisition or not, Monster will continue to be a solid investment in many growth investors' portfolios.

Disclosure: I am long MNST, KO. 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.