The advertising and promotional machine at Monster Beverage (MNST ) is borderline genius, as the company is also moving heavily into the extreme sports space as the dominant sponsor/advertiser. With the investment from Coca-Cola (KO) that beverage company has morphed from a growth niche play, into a powerhouse distributor of energy drinks and tea.
The company’s strategy seems to be paying off with youth, as every college campus now seems to carry the product, and high school age teens drink the products as a status symbol. Perhaps this is because they have hundreds of up and coming legends in their respective sports touting the product and cashing in on increased sales by the month. Bands such as Halestorm, Shinedown, Five Finger Death Punch and 10 Years are involved with MonsterTV promotions, further appealing to a wide audience beyond the guy just looking for a “pick-me-up” at the convenience store.
That said, the stock has had a great run in the last five years, though it has been under pressure in recent months. The ‘monster’ growth of the company is now being tempered by fears that monster has lost its roar. Therefore, in this column, we will dive into the recently reported numbers out of the company to see if the growth is still present. Further, we offer our take on the stock in 2018.
Sales figure continue to impress
Net sales for the 2017 fourth quarter increased 7.5 percent to $810.4 million from $753.8 million in the same period last year. This is strong, and gross sales demonstrated equally impressive growth. Gross sales for the 2017 fourth quarter increased 10.1 percent to $934.8 million from $848.8 million for the same period last year.
It should be noted that currency exchange rates often wreak havoc on domestic companies with international shares, however in Q4, foreign exchange was positive. Favorable currency exchange rates increased net sales by approximately $7.3 million and gross sales by approximately $9.3 million in the 2017 fourth quarter.
Segment sales tell an interesting story
The company’s segment sales tell an interesting story. What is key to realize is that sales are not just being driven by energy drinks, although those sales are indeed impressive. Net sales for the Monster Energy Drinks segment, which is comprised of the company’s Monster Energy drinks, Monster Hydro energy drinks, and Mutant Super Soda drinks, increased 7.6 percent to $736.1 million for the 2017 fourth quarter, from $684.4 million for the same period last year.
Net sales for the company’s Strategic Brands segment, which includes the various energy drink brands acquired from The Coca-Cola Company, increased 7.8 percent to $69.6 million for the 2017 fourth quarter, from $64.5 million in the comparable 2016 quarter.
Net sales for the “Other segment”, which includes certain products of American Fruits & Flavors sold to independent third parties, were $4.7 million for both the 2017 and 2016 fourth quarters.
We were also pleased to see that net sales to customers internationally increased 8.7 percent to $210.4 million in the 2017 fourth quarter, from $193.5 million in the corresponding quarter last year.
Gross profit weighed by sales mix and expenses
We were pleased to see operating expenses at $236.5 million, compared with $246.4 million in the 2016 fourth quarter. However, it is important to note that the comparable 2016 fourth quarter operating expenses included distributor termination expenses of $46.3 million, so in reality, this quarter’s expenses were much higher and this weighed on gross profit.
Gross profit, as a percentage of net sales was 62.1 percent as compared to 66.1 percent in the 2016 fourth quarter, primarily attributable to sales mix, inventory reserves in China, lower allowances as a percentage of sales in the 2016 fourth quarter, as well as to increases in certain other costs. One concern is rising distribution costs as a percentage of net sales. These came in at 3.6 percent for the 2017 fourth quarter, compared with 3.2 percent in the fourth quarter last year.
Factoring in what we saw on the top line as well as operational expenses, Operating income for the 2017 fourth quarter increased to $267.1 million from $251.7 million in the comparable quarter last year. When we consider selling and administrative expenses as well as an effective tax rate for the 2017 of 24.8 percent, we saw a nice boost in net income.
Net income increased 16.4 percent to $201.3 million from $172.9 million in the comparable quarter last year. Net income per diluted share for the 2017 fourth quarter increased 17.5 percent to $0.35 from $0.30 in the fourth quarter of 2016.
The strategic alignment with Coca-Cola system bottlers continues to progress and we feel this will be a benefit to improving distribution costs. While the domestic market is rather saturated with energy drink choices, we are pleased to see that in Q4 the company launched operations in a number of smaller countries with Coca-Cola system bottlers, and is currently planning for further launches or transitions in 2018, including in Argentina, Armenia, Belarus, and Tanzania. To address growth in the domestic market, the company will soon be launching Caffé Monster, an energy coffee, as Muscle Monster, an energy protein drink.
We believe that in 2018, we will see high single-digit growth in the top line. Assuming a comparable rate of expense growth, in addition to a lower effective tax rate, we see net income rising 15-18% in 2018. Given the current share price, Monster Beverage is attractively valued for entry into the stock. We are bullish.
Note this article first appeared on our partner site, TalkMarkets
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