In spite of the increased buyback plan Monster Beverage Corporation's (MNST) board approved recently, management is having difficulty keeping its recent share price valuation. The recent decline in shares of MNST has technicians scratching their heads and considering that the stock may have double topped.
Shares of MNST reached a five month low just a few days ago after two US senators pushed health regulators to look at applying more stringent standards to regulate the sale of energy drinks. MNST fell by nearly 10% on the day that this news headline was released. It is fair to say that management clearly outlined such a risk of greater government scrutiny on energy drinks which could ultimately suppress the share price. Capital Ladder Advisory Group's most recent article pointed to this risk factor as well. The following statement was taken directly from Monster Beverage Corporation's 10-Q filing:
"Proposals to limit or restrict the sale of energy drinks to minors and/or persons below a specified age and/or restrict the venues in which energy drinks can be sold and/or impose taxation on the sale of energy drinks, continue to surface and are currently pending before certain state and/or county and/or foreign country legislatures and may from time to time be proposed and/or enacted by such legislatures. Should these current or any future proposals to enact legislation to limit or restrict the sale of energy drinks to minors and/or persons below a specified age and/or the venues in which energy drinks can be sold and/or impose taxation on the sale of energy drinks, succeed and become widespread, such legislation could result in a reduction in demand for our energy drinks and adversely affect our results of operations."
Some investors saw these headwinds, which are clearly outlined in the company's quarterly filings, as warning signs that the company's lofty valuation, compared to the industry average, would come under fire. Short speculators have been circling the stock over the last 6 week period and have found power in numbers. The short interest in MNST is at all-time highs with 4,900,000 shares held short.
The question long shareholders have to ask themselves is: will the stock return toward its recent highs? As I have outlined to clients and in recent articles on Seeking Alpha, there are simply too many headwinds the company will be facing in the current quarter as well as the future quarters to come. After such a sharp rise in the share price this year already, investors may want to consider taking profits in the near term and wait for the dust to settle. The company has offered investors great returns over the last 12 months. Don't let short speculators take those returns away in their entirety.
When parsing out the Monster Beverage business we can't deny that the company is continuing to expand and grow its sales. However, we have to understand the rate of growth, how it compares to past quarters, and what analysts are projecting for 2012 and 2013 on average:
- Profit is seen rising 31% to $2.03 a share in 2012.
- Sales are predicted to climb 25% to $2.1 billion in 2012
- Profit is seen rising 21% to $2.50 a share in 2013.
- Sales are predicted to climb 16% to $2.5 billion in 2013.
As I stated above, the company is expected to continue to show growth, but at a decelerating pace in 2013. These projected growth rates are based on analysts' opinions, but are supported by the latest quarterly results and channel checks. I don't want to show incomplete data so it is important to note that a trend is clearly developing if we go back to 2011 which showed the company grew profits at a rate of 34% YoY. Not only is the rate of growth decelerating, but it is decelerating at an accelerated pace based on analysts' projected growth rates for 2013. We saw the same thing with Green Mountain Coffee Roasters (GMCR) over the last 3 quarters as the single-serve coffee giant showed continued deceleration of growth and took down its future growth forecast for fiscal 2012 and 2013.
Monster Beverage still has several markets it has yet to penetrate and the opportunity to grow in existing markets, but these opportunities may not prove to spur growth to the levels we have seen in the past from the company. Additionally, it is important for investors to consider that the cost of recent expansion efforts and those to come will likely decrease the firm's ROI. Japan, Australia, Korea, Central and Western Europe and Brazil remain sources of problems with relation to profitability for the company. Japan will prove to be a strong market for MNST, but in the near term it may prove to be a drag on profits and earnings as regulations and quality assurance standards in Japan are much more stringent in the country when compared with other nations. Essentially, these regulations in Japan can add costs to the bottom line for MNST in the near term. Korea is another market the company has been trying to enter over the last 6 months. Investors will be anxiously awaiting the inevitable entry into the Korean market as MNST has accrued considerable costs trying to reformulate products to fit within the Korean regulatory agencies' guidelines, all the while paying fees to store and secure products existing at Korea's port of entry.
Unfortunately, and by the company's own admission, Central and Western Europe remain tough markets to show profitability. Whether it is the Hungarian government enacting a tax on energy drinks that has disrupted the market or the issues competing with Red Bull in its home region of Austria, the company continues to struggle in these regions and the company continues to accrue operating losses in these regions.
We haven't yet mentioned a rather strong market for Monster Beverage which is Canada. In mid-August, the Canada Beverage Association released a press statement regarding its current position on energy drinks. Health Canada announced in late 2011 its intention to transition energy drinks from Natural Health Products (NHPs) to food products. The Canadian Beverage Association (CBA) and its members support this decision and are working with Health Canada to ensure a smooth transition. The efforts taken by the Canada Beverage Association and Health Canada are on-going and have ramifications for the energy drink producers which have yet to be determined. Investors may have to consider the effects of future decisions by the Canadian authority and regulatory bodies on the Monster Beverage business.
In my next article I will include a detailed analysis for investors with regard to YoY product launches, YoY initial pipeline builds, YoY pricing of energy drinks and the state of energy drink competition in the markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.