Monster Beverage Corporation’s (MNST - Free Report) shares have lost 18.6% in the past year, faring miserably against the Zacks Beverages - Soft drinks industry’s rally of 10.5%. Also, the company has underperformed the industry in the 4-week and 12-week time frames, which indicates the current Momentum Score of F.
Moreover, Monster Beverage’s earnings estimates revisions are pretty discouraging. Estimates for 2018 and 2019 have declined 3.4% and 3.9%, respectively, over the last 30 days, which reflect analysts’ bearish outlook over the stock.
Let’s delve into the factors that are taking this Zacks Rank #5 (Strong Sell) company downhill.
Gross Margin Woes Linger
Higher raw material costs (mainly aluminum and sweeteners) and unfavorable product have been primarily hurting margins. Gross margin declined 20 basis points (bps) in 2017. Meanwhile, Monster Beverage’s ramped up marketing spend, to boost the top line and attract customers, is likely to exert pressure on margins.
Increase in promotional allowances, $9.9-million commissions as a reduction of net sales due to the adoption of Accounting Standards Codification (“ASC”) 606, lower margin foreign operations, change in domestic product sales mix, rise in certain import costs principally freight-in aluminum cans as well as sucralose and Hydro production issues in the United States and EMEA region hurt gross margins by 420 bps in the first quarter.
The company apprehends gross margin headwinds to persist at least through the first half of 2018. Along with this, higher distribution costs from increased freight expenses are expected to put pressure on 2018 operating margin.
Softness in Beverage Industry
Health-conscious consumers are opting for better beverage alternatives like ready-to-drink tea and bottled water. This shift in consumer preferences is impacting the volumes of soda beverages and energy drinks. U.S. sales have struggled for months as Monster Beverage faces tough competition from other energy drink companies and shifting consumer preferences. This change in consumer preference is also impacting sales of food and beverage giants like PepsiCo (PEP - Free Report) , Coca-Cola (KO - Free Report) and Dr Pepper Snapple Group, Inc (DPS - Free Report) .
Overvalued to Peers
Monster Beverage has a Value Style Score of F, signifying that there is no upside potential left for the stock at the moment.
The company currently has a trailing 12-months Price-to-Earnings (P/E) ratio of 33.7, while the industry’s average is at 20.6. Looking at sales, the company currently trades at a Price-to-sales (P/S) ratio of 8.5, significantly higher than the industry average of 4.6. Some prefer this metric more than other value-focused ones because sales are harder to manipulate with accounting tricks than earnings.
These ratios show that the company is overvalued compared with its industry peers and investors should steer clear from this stock now.
Industry Outlook Negative
The Zacks Beverages - Soft drinks industry has underperformed the broader market in the past year. Currently, the industry ranks among the bottom 5% (242 out of 255 industries). Along with the weak past performance of the industry, a sluggish rank signals that companies in this space are likely to get affected due to unfavorable broader factors in the immediate future.
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