Monster Beverage Stock: Is It Worth Buying This Beast? (NASDAQ:MNST) (2024)

Monster Beverage Corporation (NASDAQ:MNST), through its subsidiaries, engages in development, marketing, sale, and distribution of energy drink beverages and concentrates in the United States and internationally. We have published our first article on the firm back in June 2022, assigning it a hold rating due to valuation concerns in an unstable macroeconomic environment. In April 2023, we have look at MNST once again from a profitability, efficiency and valuation perspective and have reiterated our previous neutral rating, citing once again valuation concerns.

While investing in the stock at both of these times resulted in positive returns, the firm has underperformed the broader market, which has gained significantly more in this time frame.

The aim of our article today is to take a look at the firm's latest quarterly results and give an update about the business and the valuation. To assess the valuation, we will be relying on a set of traditional price multiples, just like we have done it before.

Quarterly results

MNST has reported strong results for the first quarter of 2024. They have achieved record quarterly revenues of $1.90 Billion, which represents an 11.8% growth year-over-year. The first quarter gross profit margin has also expanded, reaching as much as 54.1%. The bottom-line results of the firm also did not fail to impress, as net income has increased by roughly 11% compared to the prior year, reaching $442 million. Last, but not least, we have to highlight that the firm intends to seek authorization for share repurchases up to$3.0 Billion of common stock, which is a significant figure.

So let us now look a bit deeper into these figures, starting with the sales.

Sales

First of all, we can clearly see that the demand for Monster's drink is strong and sustained and is able to drive double-digit growth despite the uncertain macroeconomic environment, which is definitely a plus for the company.

But let us now look at this growth on a more granular scale, splitting the revenue growth into segments and different geographic areas. The following table contains these summarized results.

We believe these results are very attractive. MNST's growth is not limited to a single segment or geographic area, growth can be observed across the entire table. While the strongest growth can be observed in the EMEA region, the Latin America and Caribbean region has also done very well, despite the headwinds created in Argentina due to the inflationary environment.

We also find it important to note that the portion of sales that have been generated outside the United States has increased slightly, meaning that the firm is now less reliant on a single market and has a better diversification. It also has a negative side though, the higher exposure to foreign currencies may lead to a higher fluctuation in revenues, exactly what is happening now in Argentina.

Looking forward, we believe that Monster is well-positioned to keep increasing its footprint and grow further, fuelled not only by its strong brand recognition, but also by the fact that the energy drink market is the only growing segment currently in the beverage category, as pointed out by the CEO of the firm.

We continue to see growth in the energy drink market globally. In the United States, energy is the only segment of the beverage category currently showing unit growth. We continue to grow our sales in non-Nielsen measured channels.

Further, the recent product launches and the positive feedback also likely to help the firm maintain the growth in the coming quarters and maybe even years.

Predator Energy®, our affordable energy brand, was launched in the Philippines during the quarter.

In April 2024, we launched Predator Energy® Gold Strike in a non-carbonated formula in a 500 ml PET bottle, in selected provinces in China. Initial response to this product has been positive.

The Beast Unleashed® is now available in 49 states and we have commenced with distribution of The Beast Unleashed® in 24 oz. single serve cans in the convenience and gas channel. Nasty Beast™, our new hard tea line was launched in 12 oz. variety packs in January 2024 and in 24 oz. single serve cans in February 2024, and is now available in 49 states. Early response to our hard tea line has been positive.

Our innovation pipeline for both our non-alcoholic and alcoholic beverages remains strong, [...]

Profitability

The firm has also shown an improvement in profitability, as the gross profit margin has expanded to 54.1%. This expansion has been primarily enabled by the positive impacts of the lower freight- and input costs as well as the pricing actions in certain regions, partially offset by the negative effects of the shifts in geographical sales mix.

On the other hand, operating expenses in the quarter have increased at a faster rate than sales, reaching $485.1 million or 25.5% as a percentage of net sales, up from the 24.3% in the same period in the previous year. Distribution expenses as a percentage of net sales have increased to 5% from 4.5%, selling expenses have gone up to 9.2% from 8.8% and general & administrative expenses have reached 11.4%, up from the previous year's 11%.

Last, but not least, the effective tax rates have also increased considerably from 20.1% to 23.5%, which further pressures the bottom-line results.

For comparison, the following table compares MNST's profitability metrics with those of some of its peers. While the company's profitability is undoubtedly strong, it is not necessarily outstanding in the soft drinks and non-alcoholic beverages industry.

Looking forward, we believe that the firm's profitability is likely to deteriorate further, as they are gradually increasing their footprint outside the United States. However, we believe this is a necessary trade-off as the firm is seeking growth in newer markets. In our previous article, we have actually already pointed out this gradual deterioration of the profitability, and it also played a role in not assigning the firm a "buy" rating. Today, we still believe that we would like the profitability metrics at least stabilize, before we could justify a rating upgrade.

Share buybacks

Shareholder returns are important. And as MNST is not paying dividends, we need to keep a close eye on the share repurchase programs. During the first quarter, the firm has spent more than $97 million on share repurchases, leaving around $642.4 million left from the latest authorization. The firm, however, now plans to commence with a tender offer to buy back shares for up to $3 billion, which is a meaningful amount. $2 billion is planned to be financed by cash and $1 billion is planned to be financed through different credit facilities. This action, especially the partial debt financing, represents a shift in the capital structure of the firm, essentially relying more on debt financing rather than equity financing, which could potentially lead to a lower weighted average cost of capital. By itself, we believe this is a positive move, as the firm has virtually no debt and has very strong liquidity ratios.

However, we have to maintain a healthy amount of skepticism and ask ourselves, is it the right time to do such a shift, when the interest rates are still at elevated levels? A more impactful reduction of the weighted average cost of capital might have been achieved by doing this action at a more opportune time.

Valuation

Just like before, let us look at a set of price multiples to gauge, whether MNST's stock could be an attractive investment from a value point of view or not. The following table summarizes a set of traditional multiples and compares MNST's figures with the sector median and the firm's historic averages.

We can see that MNST is still selling at a significant premium compared to the sector median, however is more attractive when compared to its own historic valuation. If we narrow down the peer group to a few key players in the industry, it still appears that MNST is overvalued.

While we have pointed out that the growth is strong and likely to continue, that the profitability, while not outstanding, is attractive and that the returns to shareholders through share buybacks are also meaningful, we still believe that this premium is not justified. We would like to see a margin of safety or an improvement in profitability before we could argue that a market outperformance is likely. For these reasons, we maintain our hold rating.

Bela Lakos