January 07, 2015 Monster Beverage Corporation (MNST-NASDAQ) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 07/08/2013 Current Price (01/06/15) $112.28 Target Price $118.00 52-Week High $112.56 52-Week Low $63.27 One-Year Return (%) 65.75 Beta 0.33 Average Daily Volume (sh) 816,362 Shares Outstanding (mil) 168 Market Capitalization ($mil) $18,863 Short Interest Ratio (days) 2.72 Institutional Ownership (%) 79 Insider Ownership (%) 14 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 18.6 Earnings Per Share (%) 19.2 Dividend (%) N/A using TTM EPS 44.9 using 2014 Estimate 42.5 using 2015 Estimate 35.1 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY Monster Beverage s third-quarter 2014 adjusted earnings of $0.70 per share surpassed the Zacks Consensus Estimate by 2.9% and the year-ago mark by 31.7% on solid margins, better cost leverage, and a lower tax rate. Revenues rose 7.7%, driven by a robust increase in sales of new products in the U.S. However, revenue missed the Zacks Consensus Estimate by 0.9%. Margins gained from lower cost of certain sweeteners, higher prices of some products and favorable changes in product sales mix. In addition, the recent deal with The Coca-Cola Company will significantly expand Monster s presence in the international energy drinks market. However, softer growth rates in the Energy category in both the U.S and international markets is draining revenues. In addition, revenues continued to be eroded by cannibalization of sales of existing Monster Energy brands. Taking all these factors into account, we maintain our Neutral recommendation on the stock. Risk Level * Below Average Type of Stock Large-Growth Industry Beverages-Soft Zacks Industry Rank * 175 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 455 A 593 A 542 A 472 A 2,061 A 2013 484 A 631 A 590 A 541 A 2,246 A 2014 536 A 687 A 636 A 586 E 2,445 E 2015 615 E 789 E 734 E 715 E 2,853 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.41 A $0.59 A $0.47 A $0.39 A $1.86 A 2013 $0.37 A $0.62 A $0.53 A $0.44 A $1.95 A 2014 $0.55 A $0.81 A $0.70 A $0.58 E $2.64 E 2015 $0.65 E $0.94 E $0.85 E $0.76 E $3.20 E Projected EPS Growth - Next 5 Years % 21 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Corona, CA. Monster Beverage Corporation (MNST) is a marketer and distributor of energy drinks and alternative beverages. Incorporated in 1990 in Delaware, Monster Beverage Corporation was previously known as Hansen Natural Corporation. In 1992, the company acquired Hansen Beverage business. The company is popularly known for its Monster Energy brand of energy drinks. Other than energy drinks, the company offers alternative beverages like non-carbonated coffee, non-carbonated espresso energy drinks, iced teas, natural sodas, apple juice and juice blends, multi vitamin juices, lemonades, vitamin enhanced waters and probiotic drinks. The company is organized into two business segments: Direct Store Delivery and Warehouse. Direct Store Delivery (DSD) (95.9% of consolidated net sales in the third quarter of 2014): The segment develops, markets and sells energy drinks through a distribution network. Warehouse (4.1% of consolidated net sales in the third quarter of 2014): The segment develops, markets and sells juice based and soda beverages directly to retailers. REASONS TO BUY Strong Portfolio: Monster Beverage Corporation offers a wide range of products under the categories of energy drinks and juice based and soda beverages. The company offers beverages under brands such as Monster Energy, Java Monster, X- Presso Monster, Worx Energy, Peace Tea, Hansen, Junior Juice, Blue Sky, Hubert s and Vidration. Performance of some of the Monster Beverage brands such as Monster Ultra Blue energy drinks, the Muscle Monster line, tea plus pink lemonade and energy Monster Rehab line have exceeded the company s expectations in the past few quarters. Growing Momentum of the Energy Drinks Market: Due to growing health and wellness consciousness -- consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns. Though the broader CSD category has been challenging in 2013 and 2014, energy drinks is one of the few sub -categories that continues to gain momentum. In fact, the energy drink category increased in mid-single digits in the U.S. in the third quarter 2014. It is believed that these products will contribute to higher sales in the near future. In fact, Monster Energy branded energy drinks contributed 99.1% of the overall increase in gross sales of the company during third quarter 2014. The increase was driven by higher demand for energy drinks in existing domestic and international markets and expansion into new international markets. Long-term Strategic Deal with The Coca-Cola Company: In Aug 2014, Monster Beverage entered into a deal with The Coca-Cola Company. Under the long-term strategic deal, Coca-Cola will acquire approximately 16.7% equity stake in Monster. In addition, Coca Cola will transfer the ownership of its Equity Research MNST Page 2
global energy drinks business, which includes brands like Relentless and Burn, to Monster Beverage making the latter Coca-Cola s exclusive energy play. The strategic deal will provide Monster Beverage full access to Coca-Cola s world-class global distribution network. Also, the company will benefit from the addition of Coca-Cola s energy brands and become a pure energy company. The deal should also significantly expand Monster s presence in the international energy drinks market where it currently has a limited presence. Most importantly, Monster Beverage s cash position should get a major boost from the deal. The transaction is expected to close in early 2015. Focus on Innovation: Product innovation plays a huge role in the company s success. There is consistent demand for new products, which are tasty as well as healthy. The company regularly creates new flavors of existing products while removing non-performing products. During 2012, the company introduced a number of products, which include several flavors of iced teas under the brand Peace Tea, Hansen s Coconut Water and Monster Energy Zero Ultra. During 2013, the company launched Monster Energy Ultra Blue in March and Monster Energy Ultra Red in September, which have been extremely successful. During the first nine months of 2014, the company introduced a mango flavored juice drink under the Peace Tea brand, two beverages under the brand Punch Monster and a Monster Energy Limited Edition Valentino Rossi energy drink. The company has also launched Monster Unleaded, a new non-caffeinated energy drink, and two carbonated energy drinks with zero calories and no sugar, Monster Energy Ultra Black and Ultra Sunrise. Strong International Presence: Monster Beverage Corporation enjoys strong international presence. Monster Beverage generates more than 20% of consolidated gross sales outside the U.S. In fact, Monster Energy international sales contributed significantly to net sales increase in 2013. The company received regulatory approval for the sale of Monster Energy in India in Oct 2013. The company intends to initiate production of Monster Energy Drinks in India and South Africa in the near future. During second quarter 2014, the company introduced Monster in Angola, Serbia, Macedonia and Bahrain. REASONS TO SELL Controversy Concerning Energy Drinks: Monster Beverage energy drinks contain 160 milligrams of caffeine in a 16-ounce can. There has been a lot of speculation on whether its energy drinks are safe for consumption especially by children and adolescents. The Food and Drug Administration is currently investigating the impact of caffeine in food and dietary supplements, which includes Monster Beverage products. The report is pending. Any undesirable changes in regulations will impact the company s operations. The company is also incurring higher professional services costs related to regulatory and litigation issues, which hurt earnings. The company continues to claim that its leading energy drinks contain half the amount of caffeine compared to coffee and hence is safe for consumption. Soft Economic Conditions: Though beverage is one of the most attractive and largely profitable markets in the world, it is also the most challenging one. The North American beverage industry has seen sluggish growth and slowdown in consumption over the last few quarters. The beverage industry is witnessing changes in consumer preferences (for example, toward health and wellness products) and also a spending shift toward lower-priced products. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly, as the surge in job growth this year is yet to translate into significantly higher wages. High Equity Research MNST Page 3
interest rates, higher healthcare costs and still-tightened credit availability continue to hurt consumer discretionary spending in the U.S. RECENT NEWS Monster Beverage Beats on Third Quarter Earnings, Lags Sales- Nov 07, 2014 Monster Beverage s third-quarter 2014 adjusted earnings of $0.70 per share beat the Zacks Consensus Estimate of $0.68 by 2.9%. In addition, earnings increased 31.7% year over year on the back of solid margins, lower costs, and a lower tax rate. Revenues Monster Beverage s third-quarter 2014 net sales of $636 million lagged the Zacks Consensus Estimate of $642 million by 0.9%. Net sales, however, rose 7.7% year over year. Revenues were affected by softer growth rates in the Energy category in both the U.S and international markets. In addition, revenues continued to be eroded by cannibalization of sales of existing Monster Energy brands like Absolutely Zero, Rehab, Import and Lo-Carb by new products such as Ultra and Muscle Monster products. However, products like Ultra, Monster Energy Ultra Black and original Monster Green energy drink continued to do well. Some of the brands that did well in the quarter include Juice Monster, Punch Monster energy drinks and Peace Tea Line. Net sales of the Direct Store Delivery (DSD) segment increased 7.6% to $609.9 million due to higher sales volumes of Monster Energy drinks, Ultra and Java Monster lines. Net sales of the Warehouse segment increased 10.1% to $26.0 million due to higher sales of Hubert's Lemonades and aseptic juices. Gross sales outside the U.S. increased 14.3% year over year to $173.2 million in the quarter. The company witnessed a 7% increase in sales in Europe, the Middle East and Africa. Margins Third-quarter 2014 gross margin rose 170 basis points (bps) to 53.8% attributable to a decrease in cost of some of the raw materials, particularly certain sweeteners, higher prices of 24-ounce Monster Energy brand energy drinks and Peace Tea line and favorable changes in product sales mix. Operating income increased 25.4% to $189.9 million owing to higher operating income from international operations such as Europe, Mexico and Japan. Operating margin was 29.9%, up 430 bps year over year on the back lower expenses. As a percentage of net sales, operating expenses decreased 250 bps to 23.9%. Monster Beverage s legal expenses during the quarter were $4.9 million, down from $6.0 million in the prior quarter. Equity Research MNST Page 4
As a percentage of revenues, distribution costs decreased 10 bps to 4.5% while selling expenses declined 190 bps to 10.1%. The company benefited from a decline in premiums, point of sale and other marketing expenses. Effective tax rate in the quarter was 35.6%, lower than 38.8% in the prior-year quarter, owing to profits earned in foreign subsidiaries. Financial Update The company ended the quarter with cash and cash equivalents of $408.3 million as of Sep 30, 2014, compared with $373.1 million as of Jun 30, 2014. During the third quarter of 2014, the company did not repurchase any shares under its existing share repurchase program. Deal with The Coca-Cola Company In Aug 2014, Monster Beverage entered into a deal with The Coca-Cola Company, which includes the sale of an equity stake and swapping of some brands with the cola giant. Under the long-term strategic deal, Coca-Cola will acquire approximately 16.7% equity stake in the energy drink maker for $2.15 billion in cash. The transaction, expected to close in early 2015, is awaiting regulatory and customary approvals. Equity Research MNST Page 5
VALUATION Monster s current trailing 12-month earnings multiple is 44.9x, representing a premium of 78.2% to the industry average of 25.2x. Over the last five years, Monster s shares have traded in the range of 17.2x to 44.9x trailing 12-month earnings. Based on 2014 earnings estimate of $2.64, the stock is trading at 42.5x a 73.5% premium to the industry average of 24.5x. At the end of the third quarter of 2014, the P/B multiple of the stock was approximately 14.0x, a huge premium to the industry average of 5.5x. Our target price of $131.00 is based on approximately 44.7x of our 2014 earnings estimate. On a P/B basis, the price target is based on a P/B multiple of approximately 16.4x. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Monster Beverage Corporation (MNST) 42.5 35.1 21.0 50.8 44.9 44.9 17.2 Industry Average 24.5 26.6 12.4 14.5 25.2 36.8 11.3 S&P 500 16.1 15.1 10.7 15.9 18.6 19.4 12.0 Embot Andina-A (AKO.A) 10.1 17.2 26.5 7.1 Embot Andina -B (AKO.B) 16.0 15.6 7.3 20.1 33.5 13.3 Cott Corporation (COT) 30.0 24.7 4.7 28.8 28.7 6.2 Coca-Cola Bottling Co. Consolidated (COKE) 9.0 24.5 26.0 13.7 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Monster Beverage Corporation (MNST) 14.0 14.1 5.1 36.6 0.0 0.0 29.6 Industry Average 5.5 5.5 5.5 N/A 0.7 1.2 N/A S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research MNST Page 6
Earnings Surprise and Estimate Revision History Equity Research MNST Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MNST. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1143 companies covered: Outperform - 15.6%, Neutral - 78.5%, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Lead Analyst QCA Copy Editor Content Ed. Reason For Update Sarmistha Roy Chowdhury Kinjel Shah Kinjel Shah Debasmita Banerjea Kinjel Shah 3Q14 Equity Research MNST Page 8