Monster Beverage: Upside Is Engaging At This Valuation (NASDAQ:MNST)

Abstract

Following my protection on Monster Beverage (NASDAQ:MNST) in March 2024, for which I really helpful a purchase ranking because of my expectation that earnings development will stay robust, with the potential to develop at >20%, this publish is to supply an replace on my ideas on the enterprise and inventory. At a excessive stage, MNST confirmed disappointing outcomes since my final publish, and that triggered a large valuation re-rating, which mixed collectively led to a pointy decline in share worth. Nonetheless, I don’t consider the expansion won’t get better given the historic developments, seen catalysts, and worldwide efficiency. On the present valuation, I consider the latest weak point has already been priced in, and the upside is enticing.

Funding thesis

Not like the previous, the place MNST was seen as a powerful earnings compounder (EPS grew 15% CAGR from FY15 to FY23), the fairness story has now switched to a “present me” story and one that’s closely hinged on 2H24 efficiency. Earlier than I get to why I feel the demand pattern will enhance within the coming intervals, I give me ideas on what actually triggered this narrative change.

There are two components to the share worth weak point. One is the poor 2Q24 earnings outcomes, which noticed income development plummet from the low-teen share vary to simply 2.5%. This resulted in EPS rising by simply 5% (down from 12% in 1Q24 and 52.8% in 2Q23). Two, and I feel that is the important thing element, was that July world gross sales had been up solely by 5.9%, and this even included a profit from the 2 extra promoting days within the quarter (July this 12 months had 23 weekdays vs. 21 weekdays final 12 months = c.9.5 level influence). Adjusting for this suggests July world gross sales to be down ~3% on a same-day foundation. And this suggests demand weak point has endured into 3Q24 (a deceleration from the two.5% development since in 2Q24).

Right here is why I feel the demand pattern will enhance within the coming intervals. The vitality drink class within the US has skilled very robust development over the previous years, and the one time it noticed a big quantity decline that MNST ever noticed was throughout the subprime disaster and COVID. Provided that the vitality drink trade shouldn’t be in a structural decline mode, I consider the present slowdown is principally because of macro-related causes. Particularly, the mixture of excessive rates of interest and the lingering influence of elevated inflation has triggered shoppers to drag again on discretionary spending and commerce all the way down to worth purchases. Once we take a look at worldwide markets like Europe, development has already rebounded, as per administration feedback within the name and Nielson’s information (consult with MS information beneath). Moreover, Celsius Holdings (CELH) remains to be rising very strongly within the US (23% in 2Q24), and this tells me that there’s nonetheless vital room for MNST to proceed penetrating the market.

Moreover, there are two different development levers to pay attention to as properly. Firstly, MNST goes to roll out a bunch of recent merchandise globally, together with a giant launch in October of Extremely Vice Guava, and these ought to assist assist robust cargo development close to time period. Secondly, MNST goes to implement a 5% pricing in 2H24 (set for 1^st November) on core manufacturers (Bang, Reign, and Reign Storm). Utilizing the final worth enhance (again in Sep’22) as a benchmark, there needs to be an excessive amount of influence on quantity, which suggests this 5% is more likely to translate immediately into income development. Thirdly, MNST worldwide development remains to be strong (14% on native foreign money foundation): (1) We all know that Europe is performing properly (~20% of the enterprise) based mostly on Nielsen’s information, and (2) we additionally know that MNST is doing very properly in China as a result of April roll-out of Predator Gold Strike in choose provinces in China, which continues to be growth-accretive and according to inner expectations. The plan is to roll out to extra provinces via FY24, which needs to be growth-accretive if the identical pattern holds.

As such, for MNST’s topline, whereas I acknowledge the latest weak point, I don’t assume this can be a enterprise that’s seeing structural development weak point. Transferring down the earnings assertion, there are additionally upside catalysts to margin enhancements that assist earnings development. Firstly, gross margin ought to enhance as the provision challenges in Germany are resolved and as manufacturing inefficiencies associated to the start-up of the Norwalk and Phoenix services (acquired as a part of the Bang transaction) enhance (at the moment solely producing Bang merchandise, so it’s totally utilized). Whereas some manufacturing inefficiencies will proceed to linger, they need to go away finally. Secondly, commodity costs ought to begin to flip in favor of MNST as inflation tapers down. As an example, aluminum costs have began to say no, and freight prices are additionally persevering with their streak of decline.

Valuation

With the inventory now buying and selling at 27x ahead PE, I consider there’s nonetheless enticing upside for buyers to seize. Whereas I keep bullish, it is sensible to regulate my estimates downwards to mirror the weak 2Q24 efficiency. I now anticipate development of 5% in FY24 and a gradual enchancment to 10% (nonetheless beneath the historic vary of low teenagers) in FY26. I’ve additionally adjusted my web margin expectation downwards in FY24 to 22% and anticipated 100 bps of enchancment over the following two years. Margin may inflect greater relying on how a lot commodity costs come down and how briskly MNST can speed up development again to low teenagers. Given the decrease development and margin expectations in the present day, I consider MNST is unlikely to commerce again to 32x ahead PE (which I anticipated beforehand). I feel a extra acceptable a number of could be ~30x (the midpoint between the low-end and common of the MNST historic buying and selling vary (28x to 32x).

Threat

The US dipping right into a recession goes to be a giant drag to development given it’s the largest a part of the enterprise. Commodity costs might flip to development mode if geopolitical rigidity additional worsens, and it will stress MNST margin. Growing competitors internationally by new entrants corresponding to Celsius might weigh on MNST worldwide development. Lastly, potential elevated regulation for the vitality drinks class is a everlasting danger that MNST must cope with.

Conclusion

In conclusion, my ranking for MNST is a purchase ranking. Whereas latest outcomes had been weak, I anticipate a restoration in development given the robust worldwide efficiency, new product launches, and upcoming worth will increase. Importantly, the vitality drink trade remained strong. On the present 27x ahead PE, I consider the latest weak point has already been priced in, and the upside is enticing based mostly on my mannequin.