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The Energy Drink Giant: Why Monster Beverage Corporation Stock is a Win for Investors (NASDAQ:MNST)

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Monster Beverage Corporation is a major competitor in the market for energy drinks and holds a solid competitive position as well as a positive outlook for future growth. The company has regularly generated significant sales growth, and in the first quarter of the fiscal year 2023, it outperformed expectations by bringing in revenue of $1.70 billion, which was an increase of 11.9% year-over-year. Additionally, the company’s EPS projections for both GAAP and non-GAAP were surpassed by a $0.05 margin. 

The unique product pipeline, great brand recognition, and dedicated customer base that Monster Beverage possesses are three of the company’s primary competitive advantages. It is well-positioned for future growth and success because of its ability to introduce new products and flavours that cater to evolving consumer preferences, as well as because of its successful pricing actions and efficient cost management.

The company has showed that it is able to effectively manage its working capital by achieving a strong financial performance in the first quarter of 2023. This performance included greater net sales, improved gross profit margins, and higher operating income. In addition, the robust partnership that Monster Beverage has with Coca-Cola, which offers the company access to a massive distribution network as well as marketing, logistics, and regulatory experience, is anticipated to fuel significant growth potential in the worldwide market for energy drinks.

Company Description

The Monster Beverage Corporation is a holding organisation. Through its subsidiaries, the company creates, markets, sells, and distributes energy drink beverages and focuses on energy drink beverages under a variety of brand names. Monster Energy Drinks, which consists of its Monster Energy drinks, Reign Total Body Fuel high performance energy drinks, Monster Tour Water, and True North Pure Energy Seltzers; Strategic Brands, which consists of the various energy drink brands; Alcohol Brands, which consists of the various craft beers and hard seltzers, as well as The Beast Unleashed FMBs; and Other, which consists of other products. Monster Energy Ultra, Java Monster, Juice Monster, Monster Hydro Super Sport, Monster Dragon Tea, Reign Total Body Fuel, True North, Mother, and Predator are among the company’s brands.

Earnings Insights & Expectations

Monster Beverage delivered another strong quarter of revenue growth in the first quarter of fiscal 2023, with revenue increasing 11.9% year-over-year to $1.70 billion, surpassing estimates by $5.73 million. The company also exceeded both non-GAAP and GAAP EPS estimates by $0.05 each.

Financial Performance:

Monster Beverage reported impressive financial results for the first quarter of 2023. The company’s net sales increased by 11.9% to $1.7 billion, compared to $1.52 billion in the same period last year. This growth was primarily driven by increased demand for the company’s products, both domestically and internationally.

Gross profit margin for Q1 2023 was 52.8%, a slight increase from the 51.1% reported in Q1 2022. This increase was attributed to pricing actions, decreased freight-in costs and decreased aluminum can costs.

Operating income for the first quarter of 2023 was $485.1 million, up 14.1% from $399.5 million in Q1 2022. This growth in operating income was primarily due to higher net sales and effective cost management. Net income for Q1 2023 was $397.4 million, or $0.38 per diluted share, compared to $294.2 million, or $0.27 per diluted share, in Q1 2022.

Cashflow Activities:

The company’s cash provided by operating activities significantly improved during the first quarter of 2023, with $424.5 million compared to last year’s $0.4 million cash used in operating activities. The increase was primarily driven by net income earned, adjustments for certain non-cash expenses, and an increase in accounts payable, accrued promotional allowances, and income taxes payable. In contrast, during the first quarter of 2022, the company had a lower cash provided by operating activities, primarily due to a significant increase in inventories and accounts receivable, as well as a decrease in income taxes payable and deferred revenue. Overall, the company’s improved financial performance and efficient management of its working capital contributed to the significant improvement in cash provided by operating activities.

During the first quarter of 2023, the company used $6.0 million in cash for financing activities, compared to $4.2 million in the same period last year. The cash used for financing activities in both periods was primarily due to the repurchases of the company’s common stock. On the other hand, the cash provided by financing activities for both periods was mainly from the issuance of the company’s common stock under its stock-based compensation plans. Overall, the company’s financing activities during the first quarter of 2023 were similar to the previous year, with stock repurchases and issuances as the main drivers of cash flows.

The company used $52.8 million in cash for investing activities during the first quarter of 2023, compared to $303.6 million in the same period last year. Cash provided by investing activities for both periods was primarily from sales of available-for-sale investments. The cash used in investing activities for both periods was mainly due to purchases of available-for-sale investments, acquisitions of fixed assets for various business activities, and construction or improvements to real property. In particular, the company invested in vans, trucks, promotional vehicles, coolers, merchandising displays, production equipment, office and computer equipment, and leasehold improvements to support its marketing and promotional activities. The company plans to continue using its excess cash for investing in short-term and long-term investments, capital equipment, and real property related to its beverage business, as well as for acquiring compatible businesses to develop its brand in international markets and other corporate purposes.

Expectations:

For the next quarter, the revenue estimate is $1.86 billion, which would be a significant jump from the previous quarter’s actual revenue of $1.70 billion. The EPS estimate for the next quarter is $0.39 on both a non-GAAP and GAAP basis.

Discovering Growth Drivers

·       Global expansion and distribution partnership with Coca-Cola

Monster Beverage Corporation, a leading energy drink brand, will combine with Coca-Cola to expand its global distribution network. Monster has used Coca-Cola’s distribution network, marketing, logistics, and regulatory skills since the 2014-2015 agreement. The partnership’s highlight is Monster’s anticipated 2023 switch to Coca-Cola’s Philippine distribution infrastructure. The company plans to transition the Monster brand to the Coca-Cola distribution system in the Philippines in 2023, following successful transitions in China, India and other markets. Monster now has access to Coca-Cola’s distribution network and customers in the Philippines, a fast-growing energy drink market. Monster will also be able to use Coca-Cola’s regional marketing, logistical, and regulatory experience and local production.

Coca-Cola’s distribution infrastructure is part of a strategic agreement with the company. Monster became Coca-Cola’s official energy play and preferred distribution partner worldwide. Monster has expanded internationally by using Coca-Cola’s marketing, logistical, and regulatory skills. Coca-Cola distributes Monster’s products in over 150 countries and advises Monster on marketing, product innovation, supply chain management, and regulatory compliance. Monster has surmounted hurdles and capitalised on possibilities in the global energy drink sector, which is predicted to increase 7.2% from 2020 to 2027.

Monster is using Coca-Cola’s 16.7% ownership (post-issuance) to raise funds and get strategic advice. In 2015, Coca-Cola bought 16.7% of Monster for $2.15 billion in cash, aligning their long-term interests. Monster’s Board of Directors includes two Coca-Cola directors. Monster may now fund acquisitions, product launches, and geographic expansion. Monster’s rise has been driven by its Coca-Cola collaboration. In 2023, Monster will join Coca-Cola’s distribution system in the Philippines, strengthening its position in the fast-growing energy drink industry. Monster will grow and provide value to shareholders with Coca-Cola’s assistance.

·       Pricing actions in the United States and certain other international markets.

The company implemented price increases in the United States and some international markets in 2022 and continued to do so in 2023, reflecting higher costs of raw materials, packaging and transportation. This has resulted in improved gross profit margins on a sequential quarterly basis from 51.3% in the 2022 third quarter to 52.8% in the 2023 first quarter. Hence, it continued to maintain strong consumer demand and market share despite price increases, indicating brand loyalty and pricing power.

·       Strong Innovation Pipeline

One of the key strengths of Monster Beverage Corporation is its innovation pipeline, which allows it to introduce new products and flavors that cater to the changing preferences and needs of consumers. The company has been launching both alcoholic and non-alcoholic beverages that leverage its existing brands and create new ones. Here is the timeline for the innovation drawn by the company from most recent time:

  • In January 2022, the company acquired CANarchy Craft Brewery for $330 million, adding brands such as Jai Alai IPA, Florida Man IPA, Dale’s Pale Ale and more to its portfolio. This acquisition expanded Monster’s presence in the craft beer segment, which is a growing and profitable market with high consumer loyalty and premium pricing.
  • In January 2023, the company launched The Beast Unleashed, the first flavored malt beverage under its namesake brand. The drink contains 6% alcohol by volume and uses some of the same flavors as the brand’s energy drinks, such as Peach Perfect and Scary Berries. The drink is distributed through certain beer distributors in the United States, using a phased state launch approach, with the goal of being national by the end of 2023. The drink marks Monster’s entry into the flavored malt beverage sector, which is a growing and lucrative market with high consumer demand and margins.
  • The company continues to develop new products and flavors for its Monster Energy, Reign, NOS Energy, Full Throttle, Predator Energy and other brands. For example, it plans to launch Monster Energy Zero Sugar at retail in the United States in January 2023, following successful launches in other international markets. It also plans to introduce Monster Tour Water, a pure unflavored water line, in still and sparkling variants in 19.2 oz aluminum cans in the first half of 2023. Additionally, it plans to introduce Reign Storm, a total wellness energy drink line, in four flavors of 12 oz slim aluminum cans in the first half of 2023.

Valuation Overview: Monster Beverage Corporation ($MNST)

Valuation Ratios Current 2023E 2024E 2025E
EV/ Sales 9.13 9.20 9.00 9.10
EV/ EBITDA 34.20 30.43 28.47 28.67
EV/ EBIT 35.50 31.60 29.54 29.47
Price/Earnings 48.80 42.48 39.33 39.09

 

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