EUR 850.00 For Business Accounts Only

Morningstar | Monster Continues to Post Substantial Top-Line Gains Abroad in 1Q, but Shares Expensive

Monster's continued international momentum was the highlight of its first-quarter earnings, as sales to customers outside of the U.S. (now contributing 30% of revenue) increased 17%, which was particularly impressive, lapping a 27% increase in the prior-year period. This supported consolidated net sales growth of 11% in the first quarter, driven by more than 11% growth in the Monster Energy brand family, which contributes around 92% of sales from a product perspective. We were pleased to see improvement in the firm's average net sales per case, which increased around 1.3% to $9.29 (albeit on an average decline of nearly 2% between fiscal 2014 and 2018) thanks to strengthened pricing in the U.S. and Canada. In our view, the firm's ability to take pricing in its home market, where its trademark brand holds around 36% volume share, according to GlobalData, is evidence that the brand intangible asset that underpins our narrow moat rating remains intact.

Moreover, we were pleased to see profitability hold steady despite this shift in geographic mix (an increasing proportion of revenue from lower-margin international markets had weighed on profitability over the last several quarters), with both gross margin and operating margin unchanged from the prior-year period at 60.6% and 32.9%, respectively.

That said, this performance is largely incorporated into our full-year outlook, which incorporates roughly 11% sales growth, 40 basis points of gross margin expansion (to 60.7%), and 130 basis points of operating margin expansion (to 35%). As such, we aren't expecting to make a material change to our $52 fair value estimate. We're also reiterating our longer-term outlook, which calls for high-single-digit sales growth and operating margin around 36% on average over our forecast. With shares up by a high-single-digit percentage, we continue to view the name as overvalued and would suggest investors wait for a more attractive risk/reward opportunity.

We think profitability was also supported by a recovery in the firm's strategic brands segment, with sales up 7%, lapping a 3% decline in the prior year period, after four quarters of year-over-year revenue declines, since this segment's concentrate model is inherently more asset-light and higher-margin.