Volatile Times For Food And Beverage Companies Reporting Earnings

by: Christopher F. Davis

Yesterday was an absolute day of crazy in the food and beverage sector and it may continue today. In this article I will highlight four companies that just reported interesting quarters and discuss the action in the stock in the session after earnings, along with important fundamentals of the stocks and my general take on each.

Monster Beverage (MNST): This premier growth company, reported Q2 EPS of $0.59, which missed by $0.02. The company pulled in revenue of $593M (+28.7% year/year), which was essentially in line. At one point immediately after hours, shares were down over 20%! The stock closed at $61 on volumes of over 10 million shares, about 5 times the normal volume. But the trouble only continued as it fell another 8% on reports it is subject to an investigation by a state attorney general into its drinks and marketing. Its Q2 was solid however, as profit margins were 51.8%. It expanded internationally and will be continuing to spread overseas in coming quarters. The street however, did not like the quarter, as it was down 10% on volume of over 10 million shares. On the conference call, CEO Rodney Sacks gave insight into the slight miss as there were issues with shipments to Japan and increased administrative costs associated with international expansion. Even with a high multiple (currently at 34 on share prices of $56), I see this stock as a strong buy, as it remains a take over target for Coca-Cola (NYSE:KO) or Pepsi-Co (NYSE:PEP) (which would be at a discount considering shares were at $80 a month ago). It has an average price target of $76 dollars with a 52-week range of $38.20 - $83.96. On top of that it has a pristine balance sheet with a lot of cash and no debt. Further, it has years of explosive growth ahead. It will be expanding into several new international markets, as discussed on the conference call, adding to future earnings. It is projected to earn $2.50 in 2013, with a five-year PEG of 2.0. Bottom line, I think it's a buy at these levels.

Wendy's (NYSE:WEN): The famous third-tier hamburger joint, which at one point surpassed Burger King Corporations' (BKW) market sales, had reported as well. WEN reported a loss, attributed to rising expenses to the company's operation. It posted a loss of $5.5 million, or $0.01 per share for the quarter. A year earlier, it had posted a profit of $11.3 million, or $0.03 a share. The massive loss for the second quarter included a $25.2 million pretax charge from early repayment of debt. Revenue was up 3.8% to $645.9 million. Higher commodity costs also affected margin in the quarter, driven primarily by beef, but it sees this headwind easing in coming quarters. WEN reiterated its outlook for the year from continuing operations, with a range from $320 million to $335 million. The highlight was that last quarter, with its rising sales, was the first time in the last four quarters that WEN had managed to grow the top line. The market was still hesitant to step in and support the stock as the quarter had mixed reception with the street, being up only $0.04 to close at $4.88 a share. The shares traded to these levels on slightly above-average volume of 2.8 million shares. The stock has a 52-week range of $4.29-$5.58, with a one-year target estimate of $5.16. The balance sheet shows a slightly decreasing revenue stream and operating margin, with a flat to slightly increasing debt-to-assets ratio trend. Given these fundamentals and the recent quarter, my recommendation is neutral. Should the stock break through $5, allowing large institutions to buy and hold with ease, I think the stock has great potential should it rack together a few winning quarters. In the meantime, I prefer competitor BKW in the short term as a trading vehicle, and McDonald's (NYSE:MCD) in the long run as an investment over WEN.

Jack in the Box (NASDAQ:JACK): JACK, another iconic fast food establishment, reported a per-share operating profit of $0.37 last quarter, topping analysts' expectations of $0.32. That was still shy of Q2-2011's $0.38. The best take away from the quarter was that same-store sales rose 3.4%, and then JACK raised its full-year income outlook range by approximately 10% above prior estimates. JACK store sales are expected to increase approximately 2.0% to 3% at Jack in the Box company restaurants. For fiscal 2012, it expects same-store sales to increase approximately 4.0% to 4.5% at Jack in the Box company restaurants. JACK opened strong on the quarterly report, but slowly sank throughout the session, to close down $0.04 at $26.02 on 2.5 times average volume at 1.3 million shares exchanging hands. The stock trades at about 16 times earnings, and just raised its full-year same-store sales guidance. JACK has a 52-week range of $18.25 - $28.44, with an average analyst price target of $29.56. The balance sheet is improving with a decreasing debt-to-asset ratio, though the company currently has less cash than in the last three quarters ($10.81 million). Given the fundamentals I think it still has room to run, and it just had its target raised by RBC Capital. The raised target from $22 to $28 came after the company reported the higher-than-expected earnings and provided higher guidance for the rest of the year. RBC thinks that the company's earnings could climb $2.00 or more, and it maintains a Top Pick rating on the shares.

Sodastream International (NASDAQ:SODA): This make your own beverage company upped its EPS 44% on a year-over-year basis. Revenue was up 49%. SODA reported that net income rose 43.9% to $9.5 million, or $0.45 a share, from $6.6 million, or $0.32 per share, a year earlier. Total revenue increased 49.1% to $103 million from $69.1 million a year earlier. Gross margins grew 54.4% versus 53% a year earlier. Moreover, marketing expenses rose 36% to $37.1 million from $22.5 million, or 32.5%. SodaStream also raised its 2012 guidance for sales growth to 40% from an earlier estimate of 33% over last year. The company increased its net income forecast from 50% to 55% above 2011. Estimates were topped for both measures, and guidance raised. Seems like a winner. Well, with this seemingly solid report, shares were down nearly 4% after reporting on heavy volume of 5.8 million shares, about 10 times the normal volume, and then fell slightly on volume of 1.9 million shares to close at $40.58 yesterday. I would speculate that this sell-off following the strong quarter was due to investor confidence in the business model, which is considered by some to be a popular fad. The stock has a 52-week range of $27.60-$51.80, with an average price target of $61.03, suggesting a lot of upside. The balance sheet shows little debt and total asset growth. My take: The stock has some room to run. I don't like the stock at these levels with a 26 P/E multiple and concerns about growth, but would consider a buy at $35.00.

These companies all recently reported fairly solid reports and traded on heavy volumes following their reports, particularly MNST and SODA, which sold off pretty significantly. While they were hammered, JACK and WEN prices were rather stagnant. One thing is certain, and that is that consumers are indeed willing to spend their money on food and beverage, beyond the necessary staples available at the supermarket, as evidence by the revenue these companies took in. These companies seem to have a bright future given their fundamentals and strong quarters. Time will tell if the stocks will shine equally as bright as their underlying companies

Disclosure: I am long MNST.