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Q3 2012 is going to be one of the toughest quarters for analysts covering Monster Beverage Corporation (MNST). After slightly missing analysts' expectations in Q2 of 2012 and still showing growth, shares of MNST continue to see strong selling and short speculation pressures. As the share price more than doubled this year, investors are now wondering and contemplating whether or not MNST has seen its best days.

This report aims to show how difficult analysts and investors have it when it comes to gauging the direction of the stock price come the release of the Q3 earnings report during the first week of November. I don't envy those having a position in the stock, whether long or short, and affiliated analysts. It really is a tough call, especially when one takes a look at the GMCR Q3 2011 to Q1 2012 earnings reports. But we will touch on this comparison between GMCR and MNST a little later.

Let's first start with Q3 2011 results and move on to Q3 2012 analysts' expectations:

  • Net sales of $474.7 million
  • Diluted earnings per share of $.88 a share
  • Net sales in Europe grew 89.6% YOY
  • Gross sales in October 2011 grew 31.1% YOY
  • Gross sales outside of the US grew 67.4% YOY
  • Gross profit margin was 52.7% in the quarter
  • Effective tax rate was 37.2% in the quarter
  • Inventories were $164 million in the quarter

Q3 2012 analysts' expectations:

  • Net sales of $587 million
  • EPS of $.57 a share
  • Sales growth of roughly 24%
  • Gross margins of 53.1%

Now that we have an understanding of what MNST is up against in the current quarter, lets analyze more closely how the company has performed recently and the on-going state of operations and the overall industry which Monster Beverage presides. First, we know and understand that this is a highly competitive industry which is led by Red Bull in dollars but Monster beverage in volume. Rockstar is another reputable competitor which is operating in many of the same markets as MNST and Red Bull. In an attempt to gain market share, Rockstar has initiated a steep pricing promotion strategy over the last 6 months and has successfully captured market shares in several markets. In Q1 2012, Rockstar grew its market share in Canada by 3.7% to finish the quarter only 8 percentage points behind MNST. The following statement was taken from Monster's Q1 2012 earnings transcript:

We believe that Rockstar numbers in this period in Canada were skewed due to the inclusion of sales of Rockstar recovery line this year which were not in last year's numbers as well as due to deep price promotions implemented by Rockstar in the first quarter of 2012.

In Q2 of 2012, Rockstar continued with their strategy of pricing promotions and results continued to grow for the company, but failed to impact Monster's results to any significant degree as Monster also continued to grow its market share in the region. Competition is nothing new for Monster Beverage as it continues to grow its product line across several categories including teas and coffee flavored beverage drinks. Although the major competitors will need to remain in focus, private label brands may show themselves to be a growing concern over the coming years. Target (TGT), Wal-Mart (WMT) and Kroger's have already launched their own private label energy drinks, teas and coffee flavored beverage mixes and drinks which offer relative value on a brand-to-brand pricing comparison basis. The threat of private label entry into this market segment is real, ever-growing and could prove to pressure margins and profitability for Monster Beverage as well as other energy drink producers going forward.

One last point about competition for Monster Beverage; in one particular market which has recently become profitable, the competition is getting bolder and harder to suppress for Monster Beverage. The market I am referring to is the UK. Western Europe, as a whole, recently became a profitable market for the company, but only a few months since this accomplishment by Monster Beverage are we beginning to see greater market share grab by Coca-Cola's (KO) energy drink brand named Relentless.

Additionally, Relentless just launched the new Apple & Kiwi flavor of Relentless Energy Drink released to the UK market. The first of the new flavor range was released in the UK this past May and in Germany this past July. If you weren't aware of the growing strength of Coke's Relentless line of energy drinks, I would encourage you to read through Monster's Q3 2011 transcript.

When it comes to products offered by Monster Beverage, one should track new product launches YOY in order to understand the effects these launches have on quarterly results. In Q3 of 2011, MNST announced the upcoming launch of Rojo Tea + Energy, Green Tea + Energy and ProTEAn, a non-carbonated protein drink with 15 grams of protein per can. Monster M3 also helped boost sales in the quarter for the company. What is important about quarterly launches of new products is that they add costs and pipeline sales builds to the company's results in the quarter.

Pipeline builds in more mature markets generally offset additional costs associated with new product launches as a point of reference. In other words, as long as distribution partners are willing to add these new products SKUs, the more product launches the better. Based on Q3 2011's lack of product launches, MNST does not have to worry about comparison product launch pipeline builds in the current quarter. This is good news for investors because the company will only need to improve on the existing product line in the marketplace at that time, but will benefit from sales of product launches which have occurred in quarters which followed. Let's move on to another metric to consider for YOY comparisons.

Another key metric to consider when evaluating Monster's performance and projecting future expectations is heavily weighted in the company's expansion efforts. Just like new product launches, expansion efforts carry both costs and sales with them. Costs are accrued through SG&A as new products introduced into a market need to be supported with advertising and promotions, something Monster Beverage is very familiar with. Sales occur as these new countries are known to issue large "pipeline builds". Pipeline builds is just an industry term for orders or sales. If we look at Q3 2011 we have to recognize the new pipeline builds that occurred in that quarter. Monster Energy launched in Greece, Cyprus, Baltic States and Colombia during Q3 2011, offering MNST roughly 4 large pipe line builds in the quarter. These new pipe line builds will need to be compared to when the company shows its results for Q3 2012. Monster's management has offered to investors that it will be opening new markets in the second half of 2012, namely Chile, Peru, Taiwan, Singapore, Philippines and additional countries in Central & Eastern Europe as well as the Middle East. With these suggested expansion efforts, Monster should be able to match YOY large pipeline builds. Below are the expanded markets Monster Beverage has established since Q3 2011: Poland, Japan, Thailand, Hong Kong, Macau and Slovenia. Due to the nature of run rates in newer developed markets, Capital Ladder Advisory Group has reservations about contributions in Q3 2012 from such regions as Macau, Hong Kong and Slovenia.

Another important issue that developed in Q3 2011 was the implementation of a tax on energy drinks in Hungary during the quarter. This taxation on energy drinks influenced the Hungarian distribution partner to buy increased volumes of Monster Beverage products ahead of the taxation and completely disrupted the marketplace in the country. This is not good news for investors as we have not heard any additional information with regards to this issue since Q4 2011, and analysts seem to have forgotten about this in their recent research notes delivered to clients as of October 10, 2012. Either way, the increased purchase by the Hungarian distributor may prove to present a lofty goal for Monster to achieve those same sales in the current quarter. We may find out how lofty this goal is when MNST releases its quarterly results on November 2nd.

Now that we have a strong handle on how to weigh competition, product launches and expansion efforts, it's time to get down to the nitty gritty of the Monster Beverage Corporation. The company's products are coming under severe scrutiny from Attorneys General and even United State senators which are seeking greater regulations to be implemented in the energy drinks industry. The company is also locked in several lawsuits which are proving to be drains on the bottom line. A recently settled class action lawsuit from shareholders carries with it indiscernible monetary values as victims have several months to place there claims against the company in-line with the judge's determination which favored the plaintiffs in this case against the beverage company. Additional lawsuits have been filed recently against the company for which our full quarterly preview provides details and can be found at capitalladders.com.

We would encourage investors to once again consider the lack of share repurchasing the company initiated during the first two quarters of the year as these lawsuits weigh on the company. However, we will see if MNST went forward and repurchased shares during Q3. With nearly $1 billion in cash on the balance sheet the company could also be preparing for another venture outside of the buyback plan, possibly the implementation of a dividend or acquisition. An acquisition of a smaller yet competitive brand might prove to be the smartest move for the company.

Volume is the key to profitability in this business segment and Monster competes in some small markets around the world that can prove difficult to achieve profitability with such vast competition. By acquiring a smaller competitor it can eliminate some competition and thus reduce the need for advertising and promotional spending in some of these smaller markets. This strategy would increase the company's profitability in these smaller markets and in those yet to be profitable markets it could add to the bottom line in a more condensed time frame. Unfortunately for shareholders, such an acquisition may prove to dilute share holder value in the near term, but it is something to consider as a part of ones overall analysis.

Getting into the nitty gritty of Japan and Korea is proving difficult for analysts and stock strategists as Japan is quite new and carries high input costs. Monster has already stated this will be a strong market for the company in quarters to come, but initial input costs could continue to be a drag on the region and the bottom line as the region matures and operation missteps are ironed out. Korea poses additional need for consideration.

It is quite possible that the company has entered Korea during the quarter although there have been no announcements from the company during the quarter. Our concern with Korea is the fact that Monster Beverage Corp. had announced publicly that its products had been approved for distribution in Korea as far back as November 2011. Only recently has the company disclosed to the public that, in fact, the company's products have not been approved and the company was going through the process of reformulation and labeling in order to gain product acceptance in the country. Below are statements made by management during the Q3 2011 earnings conference call:

Getting products improved, even in Korea, has been a challenge, because until now, they have not really permitted any energy drinks containing caffeine in Korea and South Korea. So we've had some relaxation on how to get products approved in Korea that still have efficacy, which we've done now and -- but there have been some hiccups. Red Bull just recently launched in Korea, got some shipments in, then had shipments placed on hold and had empty shelves and then had to have debates with the authorities about formulations and reformulations. And we have had an approval for our products, and we're now in the course of planning the actual launch.

Capital Ladder Advisory Group has reached out to Red Bull with regards to these statements proposed by Monster Beverage Corp.; Red Bull's director of public relations denied to comment on these remarks other than to say they have never been out-of-stock in Korea and that the company enjoys strong distributor relationships in the nation. With regards to Monster Beverage Corp. and statements made publicly by management, our full quarterly preview with forecast goes into greater details.

As I round out this quarterly preview, 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. The market often determines stock multiples based on growth for companies that are showing accelerating growth or decelerating growth. The factual representation of sales growth decelerating is noted below:

  • 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.

We 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.

Source: Monster Beverage Q3 Earnings Preview