Shares of Monster Beverage (NASDAQ:MNST) fell almost 10% in Thursday's regular trading session. On Wednesday after the close, the company reported its second-quarter results for 2012.
Second-Quarter Results
Monster Beverage, the energy drink producer, reported second quarter net revenues of $592.6 million, up 28.2% compared to 2011. Revenues came slightly short of analyst expectations of $596.1 million. The company reported a 28.1% increase in operating income to $169.8 million.
Net income came in at $109.8 million, or $0.59 per share. This compares to last year's earnings of $0.45 per share and analysts expectations of $0.61 per share. "Light" revenues and an increase in plastic and ingredient costs were limiting earnings growth.
The company experienced softness in the second quarter in both North America and Europe. Furthermore, margin expansion was held back due to production damages in connection with the launch in Korea and Japan.
CEO and Chairman Rodney Sacks commented on the results, "We are continuing to expand into new international markets with retail sales of Monster Energy commencing in Ecuador, Hong Kong, Japan, Macau and Slovenia in the second quarter. We are planning launches in additional international markets later this year and in 2013."
Segmental Information
Monster's second-quarter sales grew 24.9% in North America vs. a 16.5% growth rate for the entire energy drink market, according to a Nielsen Research note in Monster's conference call transcript.
Both the market and Monster experienced a growth slowdown in June. Market growth slowed down to 12.5%, while Monster reported a 20.2% growth increase.
Monster reported an 11% growth in Canadian sales and 45.6% growth in Mexico. Sales in Europe, Middle-East and Africa rose 51.6% on the year. Excluding the adverse currency effects, growth came in at 65.4%.
Unfortunately, the company did not break down the revenues per country or geographic region. Monster launched its products in Japan over the past quarter and is preparing launches in Chile, Peru, Singapore, Central & Eastern Europe and Korea.
Valuation
Monster Beverage ended its second quarter with $870 million in cash, equivalents and short-term investments. The company operates without the assumption of any debt. For the first six months of 2012, the company reported net sales of $1.05 billion. The company net earned $186 million, or $1.00 per diluted share. At this rate, the company is on track to report annual revenues of roughly $2.2 billion and earnings just north of $2.00 per diluted share.
After Thursday's correction, the firm is valued at $10.8 billion, or roughly $10 billion for the firm's operating assets. This values Monster at roughly 4.5 times annual revenues and 27-28 times annual earnings. The valuation compares to a revenue multiple of 3.8 times for Coca-Cola (KO) and 1.6 times for Dr. Pepper Snapple (DPS). Both competitors trade at 21 and 17 times earnings, respectively.
Currently, Monster Beverage does not pay a dividend.
Investment Thesis
Year to date, shares of Monster Beverage trade with gains of around 30%. Shares steadily drifted upwards from $45 in January to peak at $80 in June. Market speculation about a possible acquisition by Coca-Cola boosted the stock price to new all-time highs. From that point in time, shares have given up about 25% of their value. Rumors about a possible deal subsided, and investors are worrying about the impact of a slowdown of consumer spending on premium food and drink brands.
Long-term investors probably don't care too much. Investors who picked up shares a decade ago at $0.25 per share, still see incredible returns on their investments.
With earnings still growing strong and a share price which is falling, valuation multiples come down quickly. The company trades at 27-28 times annual earnings, compared to 21 times for Coca-Cola. Despite the slight miss, the company is still growing earnings much quicker than its larger rival. As such, the valuation gap seems justified. Of more concern is competition from Red Bull and Rock Star, among others. Furthermore many consumer watchdogs keep warning about the impact of energy drinks on health, especially among the youngsters.
Given signs of weakness in the month of June, I suspect very little for the stock in the short term. After years of great returns, the stock might need a little energy itself after the recent 25% pull back. Possibly the company could use its almost $1 billion cash balance to announce a share repurchase program, or provide a little energy to the stock in another way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
