Shares of Monster Beverage Corporation (MNST - Free Report) have lost 22.7% in a year, owing to strained margins that are being pressurized by elevated raw material expenses. Adverse product mix and higher freight costs are added headwinds. The stock also underperformed the industry that declined 7.1% in the same time frame.
In the third quarter of 2018, gross margin contracted 280 basis points (bps), driven by higher promotional allowances, adverse impact from the adoption of ASC 606 and higher input costs as well as unfavorable geographical gross profit mix and domestic product sales mix. These, along with higher operating expenses, hurt the company’s operating margin that fell 150 bps. Increased costs for producing soda cans due to the enacted tariffs on steel and aluminum further weigh on the company’s margins and profitability.
Moreover, the company remains prone to adverse foreign currency translations, which hurt sales in the last reported quarter. In addition, a challenging beverage landscape, thanks to the changing consumer preferences for healthier beverage alternatives, might dent the company’s top and bottom lines.
Apart from these potent limitations, Monster Beverage lagged sales estimates in three of the trailing four quarters. This has also weighed on investors’ sentiments.
Can Monster Beverage’s Initiatives Aid Growth?
While the aforementioned factors are apprehensive, we remain encouraged about Monster Beverage’s solid energy drinks category, alliance with Coca-Cola’s (KO - Free Report) bottlers and product innovation efforts.
Monster Beverage is benefiting from persistent momentum in its energy drinks category, particularly the flagship brand. The company offers a wide range of energy drinks brands, such as Monster Energy, Java Monster, Worx Energy, among others. Further, the addition of Coca-Cola’s energy drink brands to the company’s portfolio has strengthened its position in the global energy drinks market.
In the most recent quarter, management completely transitioned Monster Energy brand from the Anheuser-Busch InBev SA/NV (BUD - Free Report) distributors to Coca-Cola bottlers in the United States. Also, the company transitioned the brand in the remainder of Arkansas. Further, it extended the distribution of Monster to 40 major cities in India. The momentum is expected to continue, thus, aiding the company’s overall performance.
Meanwhile, Monster Beverage boasts a solid international presence and remains on track for further expansion to gain market share. Notably, the company has been expanding its international operations into various markets — including China, India, African and the Middle Eastern countries. Net sales to customers outside the United States were up 8.8% in the third quarter of 2018.
Monster Beverage regularly innovates and launches products to meet the consumers’ demand. Notably, the company rolled out brands across various countries in the third quarter of 2018 and remains on track for further launches in the fourth quarter.
We expect these initiatives to aid Monster Beverage in combating headwinds and regaining the stock’s lost momentum.
Monster Beverage currently carries a Zacks Rank #3 (Hold).
You may consider a better-ranked stock in the same industry, Keurig Dr Pepper Inc. (KDP - Free Report) having expected long-term earnings growth rate of 17.1% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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