Monster Beverage Is Being Punished Too Harshly

| About: Monster Beverage (MNST)

Monster Beverage Corp. (NASDAQ:MNST) announced its earnings results this week. The results were impressive in the face of the slowing global economy, but apparently not impressive enough for investors of the company. It looks like more and more companies are getting crushed by the ultra-high expectations of analysts and investors. In the after-hours of Wednesday, the stock price plunged by as much as 18%, but it ended Thursday down by about 10%. The sell-off might continue for a few more days.

What caused the sell off? Well, the company earned 59 cents per share, whereas analysts were expecting it to earn 61 cents per share. This is a growth of 31% compared to the 45 cents per share in the same quarter last year. The company's quarterly revenue increased from $527.5 million to $678.9 million since last year. This is a growth of 29% year to year. Keep in mind that the global economy has been pretty slow in the last year. The company's net sales for the quarter totaled $593 million, as opposed to analyst estimates of $596 million. Wow, what a huge miss!

Monster's gross margin fell from 52.8% to 51.8% during the quarter. This alarmed many investors, but I don't find it very worrisome. In the last quarter, commodity prices were high and demand for goods was low. Besides, having margins of over 50% in a slowing economy is quite impressive for a beverage company. Even a giant like Coca-Cola (NYSE:KO) experienced a decline in its gross margin in the last quarter and Monster's drop in gross margin was only 1%. The company's gross margin was also hurt by increased shipping costs due to the company's increased overseas exposure and the effects of currency. Once the economy gets going, the margins will pick up again.

Energy drinks are quickly becoming more popular in US and elsewhere. Monster is one of the important players in this market, as the company takes advantage of this fast growing market. In the past few years, Monster saw a lot of growth through the introduction of its beverages to new markets and it will continue to be exposed to new markets in the following quarters. As people work longer hours at their school and work, the demand for energy drinks increases. I like Monster far more than other energy drink companies because it has a very large portfolio of a variety of beverages, unlike many other energy drink companies who only focus on two or three flavors. Currently, Monster offers more than 15 different flavors and the company is likely to increase the number of flavors it offers.

In the last quarter, the company introduced its products in Ecuador, Hong Kong, Japan, Macau, and Slovenia. According to the conference call, the company is committed to add more countries to its portfolio in the next quarter. In the US, as of the second quarter of 2012, Monster energy drinks were being sold in many markets including but not limited to Wal-Mart (NYSE:WMT), dollar stores, Fred's, DeCA military stores, Sam's and BJ's, and Costco. Now it is possible to see Monster Beverage products in almost every gas station and convenience store in the US. Personally speaking, I haven't seen a gas station store that doesn't carry at least a few flavors of Monster energy drinks in a long time. On the other hand, Monster could get more exposure to bars, restaurants and airports, as these places still seem to be dominated by the presence of Red Bull brand of energy drinks.

Currently, the company's share price is $61. Analysts expect the company's share price to reach the low $80s in the next 12 months, indicating an upside of 30%. While the company has a relatively high P/E ratio of 34, this doesn't worry me as Monster is a growth company that is expected to post double-digit growth for at least the next five-six years.

Besides, when we look at the balance sheet of the company, we see $1.3 billion worth of assets and no debt. As the company continues to generate healthy amount of cash flow, it will add to its assets while avoiding debt. The company has great growth potential and lacks debt, making it a great acquisition target. I am sure that Coca-Cola will continue to keep this company on its radar for a while.

Earlier, I bought some shares of Monster when it fell to $61. If it falls below $60, I will be buying more shares to bring my average costs down. There is very little to no reason for Monster to trade at these prices, given the company's past successes and its growth potential.

Disclosure: I am long KO, MNST.