EUR 850.00 For Business Accounts Only

Morningstar | Long-Term Outlook for Monster Intact After in Line 2Q Results; Shares Not a Bargain

We don't expect a significant change to our $48.50 fair value estimate for narrow-moat Monster Beverage after the firm posted second-quarter results that tracked in line with our full-year outlook. Net sales were up 12% (a touch above our 10%-11% annual expectation) and operating margin contracting 340 basis points to 35% (comparable to our estimate). These solid top line gains were fueled entirely by volume growth, as the firm continues to expand its distribution through the Coca-Cola bottling system. Excluding the impact of a revised accounting standard, average net sales per case remained roughly flat at $9.28. Sales to customers outside of the U.S. grew above 18% (on top of a 24% increase in the prior year period) and now account for nearly 30% of net revenue, versus just 20% in fiscal 2012. We're reiterating our view that international expansion will be the primary driver of our outlook for 10% total average sales growth over the next five years, and model international sales growing by a mid-teens pace over this time frame.

However, we maintain that this ongoing shift abroad will place further pressure on near-term total gross margin, as evidenced by this metric contracting 320 basis points to 61% (though we note 40 basis points of this decline can be attributed to the new accounting standard). In this context, gross margin fell below 47% (excluding the impact of the accounting standard) from 49% during the prior year period in the Europe, Middle East, and Africa region, and to 49% from 51% in Asia Pacific. Input cost inflation (particularly for aluminum) and a mix shift toward lower margin fare (Monster Energy, a finished product, outpaced sales in the Strategic Brands segment, which relies on a higher-margin concentrate model) also dampened profitability. However, we expect these pressures to moderate longer term as the firm benefits from enhanced scale abroad, allowing gross margin to stabilize in the low 60s over our forecast.