Monster Beverage Fails To Beat Estimates, But Recovers From A Sharp Drop

| About: Monster Beverage (MNST)
This article is now exclusive for PRO subscribers.

The roller coaster ride continues on for investors of Monster Beverage (NASDAQ:MNST). On Wednesday evening, the company announced its quarterly earnings in the after-hours, which resulted in a 17% drop in the company's already-crushed share price. The free fall continued in the pre-market hours of Thursday, but it came to a halt once the market opened. Between the market's open and the closing, the stock price advanced by 14%, which means that the stock price only fell by 1.29% compared to the closing price of the previous day.

The company's quarterly revenue was $541.9, which is an increase of 14%. Monster earned $86.1 million in the quarter, which translates into 47 cents per share. Analysts were looking at 55 cents per share, and the company missed the average analyst estimate by eight cents. This raised concerns about the company's slowing growth rate, and these worries initially gave Monster the lowest P/E ratio it had since 2010 (back then its name was Hansen's Natural). Coincidentally, the company's quarterly growth rate was the slowest rate since 2010. Since June, the company's share price is down by 45%. On a positive note, the company posted a 28% year to year revenue growth in the month of October.

The company's operating expenses jumped from $118.2 million to $132.9 million, and this affected the company's margins negatively. Monster's gross margin was down to 50.5% compared to 52.7% a year ago in the same quarter. The margins were partly hurt by the discounted sales offered by the company. If Monster's expenses grow as fast as its revenue growth, the company will have a lot of trouble with growing its earnings. In the USA, the company's gross sales increased at a much faster rate than it did outside of the USA, as it grew from $117 million to $145 million, which translates into a growth rate of 24%.

The amount of cash and short term investments held by Monster fell significantly since the end of last year, despite profitable three quarters for the company. By December 31st 2011, the company was holding cash and short term investments worth $770 million, whereas the number stands at $590 million today. Monster's inventories jumped from $155 million to $193 million during this period. On a positive note, the company's balance sheet continues to be free of debt.

The company had some trouble with moving to some markets in Japan and South Korea, which caused it to lose some money. The company currently produces most of its drinks in the USA where these drinks are put into cans. It turns out that a lot of the cans were damaged in the ships on their way to Japan and South Korea. Monster will have to find a way to produce and can its products nearer to where it wants to sell them. In addition to the shipping issues, Monster also suffered from the effects of the strong dollar in some countries. In the next quarter, South American countries such as Chile and Peru will be in the company's radar, as it will try to launch its products in this geographical location.

In addition, the company once again denied that its products were dangerous to consume. During the conference call, the company's CEO Rodney Sacks explained how a can of Monster Energy contains less caffeine than a cup of Starbucks coffee and later on claimed that Monster Energy drinks were as safe as a cup of coffee. This is important to note, because the cans of Monster Energy drinks don't disclose the amount of caffeine, which raised a lot of speculation about the topic recently. Personally this is the first time I was informed about the amount of caffeine in Monster products.

"We believe that consumers are justified based on that long track record in having confidence in the safety of our products. A principal area of attention relates to caffeine. Unfortunately, there has been some misinformation published recently regarding the caffeine content of Monster. So let me give you the facts. Monster energy drinks generally contain approximately 10mg of caffeine per ounce from all sources. By comparison, the leading brands of coffee house brewed coffee, for example Starbucks, contain on average in excess of 20mg of caffeine per ounce. In other words, a 16 ounce can of Monster Energy contains about half the caffeine of a 16 ounce cup of coffeehouse brewed coffee. Even a 24 ounce can of Monster Energy, which contains about 240mg of caffeine from all sources, has about 30% less caffeine than an average medium sized 16 ounce cup of coffeehouse brewed coffee."

Currently the stock price sits at its 52-week low and it seems to have a lot of buyers when the price falls below $41 per share. The share price doesn't really spend much time below this price and it bounces back quickly after falling to this level. This stock is very volatile and investors should stop watching it daily after buying the shares. This is a stock to buy, forget about and sell a few years later. I don't know if drinking Monster energy drinks actually leads to heart attacks, but following this stock's movement daily may cause such attacks. I should add that this stock is for people whose retirement is at least 5 years away.

Disclosure: I am long MNST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.